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, 2014

 

Commission File Number 1-12928

 

AGREE REALTY CORPORATION

(Exact name of Registrant as specified in its charter)

 

Maryland   38-3148187
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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:

 

  Name of Each Exchange
Title of Each Class   On Which Registered
Common Stock, $.0001 par value   New York Stock Exchange


Securities Registered Pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x 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. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x

 

The aggregate market value of the Registrant’s shares of common stock held by non-affiliates was approximately $452,247,390 as of June 30, 2014, based on the closing price of $30.23 on the New York Stock Exchange on that date.

 

At February 27, 2015, there were 17,617,747 shares of common stock, $.0001 par value per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement for the annual stockholder meeting to be held in 2015 are incorporated by reference into Part III of this Annual Report on Form 10-K as noted herein.

 

 
 

 

AGREE REALTY CORPORATION

Index to Form 10-K

 

    Page
     
PART I    
     
Item 1: Business 1
     
Item 1A: Risk Factors 5
     
Item 1B: Unresolved Staff Comments 16
     
Item 2: Properties 16
     
Item 3: Legal Proceedings 21
     
Item 4: Mine Safety Disclosures 21
     
PART II    
     
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 21
     
Item 6: Selected Financial Data 22
     
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 7A: Quantitative and Qualitative Disclosure about Market Risk 30
     
Item 8: Financial Statements and Supplementary Data 32
     
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 32
     
Item 9A: Controls and Procedures 32
     
Item 9B: Other Information 32
     
PART III    
     
Item 10: Directors, Executive Officers and Corporate Governance 33
     
Item 11: Executive Compensation 33
     
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 33
     
Item 13: Certain Relationships and Related Transactions, and Director Independence 33
     
Item 14: Principal Accountant Fees and Services 33
     
PART IV    
     
Item 15: Exhibits and Financial Statement Schedules 34
     
SIGNATURES   36

 

 
 

 

PART I

 

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, included 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

 

The Company

Agree Realty, 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. We were founded in 1971 by our current Executive Chairman, Richard Agree, and listed on the New York Stock Exchange (“NYSE”) in 1994.

 

As of December 31, 2014, our portfolio consisted of 209 properties located in 37 states and totaling approximately 4.3 million square feet of gross leasable area. Our portfolio included 203 net lease properties, which contributed approximately 91.6% of annualized base rent, and six community shopping centers, which generated the remaining 8.4% of annualized base rent.

 

As of December 31, 2014, our portfolio was approximately 98.6% leased and had a weighted average remaining lease term of approximately 11.9 years. A significant majority of our properties are leased to national tenants and approximately 55.8% 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.

 

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 98.06% interest as of December 31, 2014. 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, 2014, we had 14 full-time employees, including executive, investment, due diligence, construction, 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 electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act can be accessed through this site, free of charge, as soon as reasonably practicable after we electronically file or furnish such reports. These filings are also available on the SEC’s website at www.sec.gov. Our website also contains copies of our corporate governance guidelines and code of business conduct and ethics, as well as the charters of our audit, compensation and nominating and governance committees. The information on our website is not part of this report.

 

Recent Developments

 

Investments

During 2014, we announced approximately $165.2 million of investments in net leased retail real estate, including the acquisition of 77 properties for an aggregate purchase price of approximately $147.5 million and the completed development of five properties for an aggregate cost of approximately $17.7 million. These 82 properties are leased to 34 different tenants operating in 15 unique retail sectors and are located in 24 states. These assets are 100% leased for a weighted average lease term of approximately 14.1 years and the weighted average capitalization rate on our investments was approximately 8.2%.

 

We calculate the weighted average capitalization rate on our investments by dividing annual expected net operating income derived from the properties by the total investment in the properties. Annual expected net operating income is defined as the straight-line rent for the base term of the lease less property level expenses (if any) that are not recoverable from the tenant.

 

1
 

 

Dividends

During 2014, we increased our quarterly dividend twice, including an increase from $0.41 per share to $0.43 per share in March 2014 and an increase from $0.43 per share to $0.45 per share in December 2014.

 

The quarterly dividend of $0.45 per share represents an annualized dividend of $1.80 per share and an annualized dividend yield of approximately 5.8% based on the last reported sale price of our common stock on the NYSE of $31.09 on December 31, 2014. We have paid a quarterly cash dividend for 83 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 December 2014, we issued 2,587,500 shares of common stock at a price of $29.67 per share, including 337,500 shares purchased by the underwriters upon the exercise of their option to purchase additional shares. After underwriting discounts and other estimated offering costs of $3.5 million, the net proceeds of approximately $73.3 million were used to repay borrowings under our revolving credit facility, which were used primarily to fund property acquisitions.

 

In July 2014, we entered into a $250.0 million senior unsecured revolving credit and term loan agreement consisting of a new $150.0 million revolving credit facility (the “Credit Facility”), a new $65.0 million term loan due 2021 (the “2021 Term Loan”) and conforming amendments to our existing $35.0 million term loan due 2020 (the “2020 Term Loan”).

 

The Credit Facility matures July 21, 2018, with an additional one-year extension at our option, subject to customary conditions. Borrowings under the Credit Facility are priced at LIBOR plus 135 to 200 basis points, depending on the Company’s leverage. The Credit Facility replaced our previous $85.0 million revolving credit facility and may be increased to an aggregate of $250.0 million at our election, subject to certain terms and conditions. As of December 31, 2014, $15.0 million was outstanding under the Credit Facility bearing a weighted average interest rate of approximately 1.5%.

  

The 2021 Term Loan matures July 21, 2021. Borrowings under the 2021 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the Company’s leverage. We entered into interest rate swaps to fix LIBOR at 2.09% until maturity, implying an all-in interest rate of 3.74% at closing. Proceeds from the 2021 Term Loan were used to repay borrowings under our previous revolving credit facility, which were used primarily to fund property acquisitions. As of December 31, 2014, $65.0 million was outstanding under the 2021 Term Loan.

 

Additionally, conforming changes were made to certain terms and conditions of the 2020 Term Loan as part of the agreement. The maturity date and pricing remained unchanged. As of December 31, 2014, $35.0 million was outstanding under the 2020 Term Loan.

 

Dispositions

During 2014, we sold four properties for aggregate gross proceeds of $12.9 million, which resulted in a loss of $405,000. Dispositions included three non-core community shopping centers (Ironwood Commons in Ironwood, Michigan, Petoskey Town Center in Petoskey, Michigan and Chippewa Commons in Chippewa Falls, Wisconsin), as well as a ground leased parcel in East Lansing, Michigan that was subject to a purchase option exercised by the ground lessee. Ironwood Commons was reflected as property held for sale at December 31, 2013.

 

Leasing

During 2014, excluding properties that were sold, we executed lease extensions on over 330,000 square feet of gross leasable area throughout the portfolio. The annual rent generated from these extensions was approximately $1.8 million both before and after the extensions. Material extensions included a 90,500 square foot freestanding Kmart in Oscoda, Michigan, an 86,500 square foot Kmart at Marshall Plaza in Marshall, Michigan, a 52,300 square foot freestanding Kmart in Grayling, Michigan, a 20,000 square foot Staples at Central Michigan Commons in Mt. Pleasant, Michigan and a 52,000 square foot Best Buy at North Lakeland Plaza in Lakeland, Florida.

 

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Business Strategies

Our primary business objective is to generate consistent shareholder returns by 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 focused primarily on the fee simple ownership of properties net leased to national or large, regional retailers operating in e-commerce and recession resistant sectors. 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 Acquisitions, Development and Joint Venture Capital Solutions platforms. Each platform leverages the Company’s collective real estate acumen to pursue investments in net lease retail real estate.

 

Acquisitions: We launched our acquisitions platform in April 2010. Since its inception, we have acquired 139 properties for an aggregate purchase price of approximately $377.6 million. These properties are net leased to over 50 different tenants representing more than 22 unique retail sectors and are located in 34 states. We pursue acquisition opportunities that meet both our real estate and return on investment criteria and that will diversify our existing portfolio.

 

Development and Joint Venture Capital Solutions: We have been developing retail properties since the formation of our predecessor in 1971 and have developed 61 of the 209 properties in our portfolio as of December 31, 2014, including 55 of our net lease properties and all six community shopping centers. We direct all aspects of the development process, including site selection, land acquisition, lease negotiation, due diligence, design and construction.

 

We launched our Joint Venture Capital Solutions (“JVCS”) platform in April 2012. Our JVCS program allows us to acquire properties by partnering with private developers on their in-process developments. We offer development and construction expertise, retailer relationships, access to capital and forward commitments to purchase that facilitate the successful completion of their projects. We typically own a 100% fee simple interest in JVCS projects upon completion.

 

We believe that development and JVCS projects have the potential to generate superior risk-adjusted returns on investment in properties that are substantially similar to those which we acquire.

 

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 historically utilized common equity offerings, secured mortgage borrowings, unsecured bank borrowings and the sale of properties to meet our capital requirements. We evaluate our financing policies on an on-going basis in light of current economic conditions, capital markets access, relative costs of equity and debt securities, market value of our properties and other factors.

 

At December 31, 2014, our ratio of total debt to total market capitalization, assuming the conversion of limited partnership interests in the Operating Partnership (“OP Units”), was approximately 28.5% and our ratio of total debt to total gross assets (before accumulated depreciation) was approximately 34.1%.

 

As of December 31, 2014, our total debt outstanding was $221.8 million, including $106.8 million of secured mortgage debt that had a weighted average fixed interest rate of 4.3% (including the effects of interest rate swap agreements) and a weighted average maturity of 5.1 years, $100 million of unsecured term loan borrowings that had a weighted average fixed interest rate of 3.8% (including the effects of interest rate swap agreements) and a weighted average maturity of 6.3 years, and $15.0 million of borrowings on our Credit Facility at a weighted average interest rate of approximately 1.5%.

 

3
 

 

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 paid for by tenants. At our six community shopping center properties, we sub contract on site functions such as maintenance, landscaping, snow removal and sweeping. The cost of these functions is generally reimbursed by our tenants. Personnel from our corporate headquarters conduct regular inspections of each property and maintain regular contact with major tenants.

 

We have a management information system designed to provide management with the operating data necessary to make informed business decisions on a timely basis. This system provides us rapid access to lease data, tenants’ sales history, cash flow budgets and forecasts. Such a system enables us to maximize cash flow from operations and closely monitor corporate expenses.

 

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" 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, some 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, 2014, we lease 32 properties to Walgreens which represented approximately 21.9% of our total annualized base rent. The weighted average remaining lease term of our Walgreens leases was 13.8 years. No other tenant accounted for more than 5.0% of our annualized base rent as of December 31, 2014. 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 a potential for environmental liability on the part of the owner or operator of such real property. If hazardous substances are discovered on or emanating from a property, the owner or operator of the property may be held strictly liable for all costs and liabilities relating to such hazardous substances. We have obtained a Phase I environmental study (which involves inspection without soil sampling or ground water analysis) conducted by independent environmental consultants on each of our properties 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 conducting additional investigation as warranted.

 

We have no knowledge of any hazardous substances existing on any of our properties in violation of any applicable laws; however, no assurance can be given that such substances are not located on any of the properties. We carry no insurance coverage for the types of environmental risks described above.

 

4
 

 

We believe that we are in compliance, in all material respects, with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. Furthermore, we have not been notified by any governmental authority of any noncompliance, liability or other claim in connection with any of the properties.

 

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. The 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, 2014, 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.

 

Item 1a:              Risk Factors

 

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, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”). We intend 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 include 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; risks that our acquisition and development projects will fail to perform as expected; 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; a failure of our properties to generate additional income to offset increases in operating expenses; our ability to maintain our qualification as real estate investment trust (“REIT”) for federal income tax purposes and the limitations imposed on our business by our status as a REIT; legislative or regulatory changes, including changes to laws governing REITs; and other factors discussed in Item 1A. “Risk Factors” and elsewhere in this report and in subsequent filings with the Securities and Exchange Commission (“SEC”). We caution you that any such statements are based on currently available operational, financial and competitive information, and that you should not place undue reliance on these forward-looking statements, which reflect our management’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward–looking statements to reflect events or circumstances as they occur.

 

Risks Related to Our Business and Operations

 

Global economic and financial conditions may have a negative effect on our business and operations.  

Any worsening of economic conditions in our markets, including any disruption in the capital markets, could adversely affect our business and operations. Potential consequences of economic and financial conditions include:

·the financial condition of our tenants may be adversely affected, which may result in tenant defaults under the leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;
·current or potential tenants may delay or postpone entering into long-term net leases with us which could lead to reduced demand for commercial real estate;

 

5
 

 

·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 stockholders and increase our future interest expense;
·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
·one or more lenders under the 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.

 

Single-tenant leases involve significant risks of tenant default.  

We focus our development and investment activities on ownership of real properties that are net leased to a single tenant. Therefore, the financial failure of, or other default in payment by, a single tenant under its lease is likely to cause a significant reduction in our operating cash flows from that property and a significant reduction in the value of the property, and could cause a significant reduction in our revenues and a significant impairment loss.  We may also incur significant losses to make the leased premises ready for another tenant and experience difficulty or a significant delay in re-leasing such property.

 

Failure by any major tenant with leases in multiple locations to make rental payments to us, because of a deterioration of its financial condition or otherwise, would have a material adverse effect on us.

We derive substantially all of our revenue from tenants who lease space from us at our properties. Therefore, our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our tenants. At any time, our tenants may experience a downturn in their business that may significantly weaken their financial condition, particularly during periods of economic uncertainty.  As a result, our tenants may delay lease commencements, decline to extend or renew leases upon expiration, fail to make rental payments when due, close a number of stores or declare bankruptcy. Any of these actions could result in the termination of the tenant’s leases and the loss of rental income attributable to the terminated leases. In addition, lease terminations by a major tenant or a failure by that major tenant to occupy the premises could result in lease terminations or reductions in rent by other tenants in the same shopping centers under the terms of some leases. In that event, we may be unable to re-lease the vacated space at attractive rents or at all. The occurrence of any of the situations described above would have a material adverse effect on our results of operations and our financial condition. See “—We may be subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants,” below.

  

We may be subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants.  

As of December 31, 2014, we derived approximately 21.9% of our annualized base rent from Walgreens. In the event of a default under its leases, we may experience delays in enforcing our rights as lessor and may incur substantial costs in seeking to protect our investment. Any bankruptcy, insolvency or failure to make rental payments, or any adverse change in its financial condition, or any other tenant to whom we may have a significant credit concentration now or in the future, would likely result in a material reduction of our cash flows and material losses to our company.

 

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 prepetition claim subject to statutory limitations, and therefore such amounts received in bankruptcy are likely to be substantially less than the remaining rent we otherwise were owed under the leases.  In addition, any claim we have for unpaid past rent could be substantially less than the amount owed.  

 

6
 

 

Certain of our tenants at our community shopping centers have the right to terminate their leases if other tenants cease to occupy a property.  

In the event that certain tenants cease to occupy a property, although under most circumstances such a tenant would remain liable for its lease payments, such an action may result in certain other tenants at our community shopping centers having the right to terminate their leases at the affected property, which could adversely affect the future income from that property.  As of December 31, 2014, each of our community shopping centers had tenants with those provisions in their leases.

 

Our portfolio has limited geographic diversification, which makes us more susceptible to adverse events in these areas.  

Our properties are located throughout the United States and in particular, the State of Michigan (with 45 properties or 27.8% of our annualized base rent as of December 31, 2014).  An economic downturn or other adverse events or conditions such as terrorist attacks or natural disasters in these areas, or any other area where we may have significant concentration now or in the future, could result in a material reduction of our cash flows or material losses to our company.

 

Risks associated with our development and acquisition activities. 

We intend to continue the development of new properties and to consider possible acquisitions of existing properties.  We anticipate that our new developments will be financed under the Credit Facility or other forms of construction financing that will result in a risk that permanent financing on newly developed projects might not be available or would be available only on disadvantageous terms. In addition, new project development is subject to a number of risks, including risks of construction delays or cost overruns that may increase anticipated project costs, and new project commencement risks such as receipt of zoning, occupancy and other required governmental permits and authorizations and the incurrence of development costs in connection with projects that are not pursued to completion.  If permanent debt or equity financing is not available on acceptable terms to 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.

 

Properties that we acquire or develop may be located in new markets where we may face risks associated with investing in an unfamiliar market.

We may acquire or develop properties in markets that are new to us. When we acquire or develop properties located in these markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures.

 

We own 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 certain of our properties through leasehold interests in the land underlying the buildings and we may acquire additional buildings in the future that are subject to similar ground leases. As lessee under a ground lease, we are exposed to the possibility of losing the property upon termination, or an earlier breach by us, of the ground lease, which may have a material adverse effect on our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our common stock. Our ground leases contain certain provisions that may limit our ability to sell certain of our properties. In order to assign or transfer our rights and obligations under certain of our ground leases, we generally must obtain the consent of the landlord which, in turn, could adversely impact the price realized from any such sale.

 

Joint venture investments may expose us to certain risks.

We may from time to time enter into joint venture transactions for portions of our existing or future real estate assets.  Investing in this manner subjects us to certain risks, among them the following:

 

·We may not exercise sole decision-making authority regarding the joint venture’s business and assets and, thus, we may not be able to take actions that we believe are in our company’s best interests.
·We may be required to accept liability for obligations of the joint venture (such as recourse carve-outs on mortgage loans) beyond our economic interest.
·Our returns on joint venture assets may be adversely affected if the assets are not held for the long-term.

 

7
 

 

The availability and timing of cash distributions is uncertain.

 

We expect to continue to pay quarterly distributions to our stockholders. However, we bear all expenses incurred by our operations, and our funds generated by operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to our stockholders. In addition, our board of directors, in its discretion, may retain any portion of such cash for working capital. We cannot assure our stockholders that sufficient funds will be available to pay distributions.

 

We depend on our key personnel.  

Our success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, our executive officers, each of whom would be difficult to replace. If any of our key personnel were to cease employment with us, our operating results could suffer. Our ability to retain our executive officers or to attract suitable replacements should any members of the management group leave is dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their availability could adversely impact our future development or acquisition operations, our financial condition and cash flows. Further, such a loss could be negatively perceived in the capital markets. We have not obtained and do not expect to obtain key man life insurance on any of our key personnel.

 

We face significant competition.  

We face competition in seeking properties for acquisition and tenants who will lease space in these properties from insurance companies, credit companies, pension or private equity funds, private individuals, investment companies, other REITs and other industry participants, many of which have greater financial and other resources than we do.  There can be no assurance that we will be able to successfully compete with such entities in our development, acquisition and leasing activities in the future.

 

We face risks relating to cybersecurity attacks, loss of confidential information and other business disruptions.

Our business is at risk 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 compromise the confidential information of our tenants, employees and third party vendors and affect the efficiency of our business operations.

 

General Real Estate Risk

 

Our performance and value are subject to general economic conditions and risks associated with our real estate assets.

There are risks associated with owning and leasing real estate.  Although many of our leases contain terms that obligate the tenants to bear substantially all of the costs of operating our properties, investing in real estate involves a number of risks. Income from and the value of our properties may be adversely affected by:

 

·Changes in general or local economic conditions;
·The attractiveness of our properties to potential tenants;
·Changes in supply of or demand for similar or competing properties in an area;
·Bankruptcies, financial difficulties or lease defaults by our tenants;
·Changes in operating costs and expense and our ability to control rents;
·Our ability to lease properties at favorable rental rates;
·Our ability to sell a property when we desire to do so at a favorable price;
·Unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions;
·Changes in or increased costs of compliance with governmental rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder; and
·Unanticipated expenditures to comply with the Americans with Disabilities Act and other similar regulations.

 

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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 always 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 stockholders would be adversely affected.  There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of their leases.

 

A property that incurs a vacancy could be difficult to sell or re-lease.

A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases. Certain of our properties may be specifically suited to the particular needs of a tenant. We may have difficulty obtaining a new tenant for any vacant space we have in our properties. If the vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash available to be distributed to stockholders. In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.

 

Potential liability for environmental contamination could result in substantial costs.  

Under federal, state and local environmental laws, we may be required to investigate and clean up any release of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or actual responsibility, simply because of our current or past ownership or operation of the real estate.  If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our stockholders.  This potential liability results from the following:

 

·As owner we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination.
·The law may impose clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination.
·Even if more than one person is responsible for the contamination, each person who shares legal liability under environmental laws may be held responsible for all of the clean-up costs.
·Governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.

 

These costs could be substantial and in extreme cases could exceed the value of the contaminated property.  The presence of hazardous substances or petroleum products or the failure to properly remediate contamination may adversely affect our ability to borrow against, sell or lease an affected property.  In addition, some environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination.

 

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We own and may in the future acquire properties that will be operated as convenience stores and gas station facilities. The operation of convenience stores and 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 is also a risk that tenants may not satisfy their environmental compliance and indemnification obligations under the leases.  Any of these events could substantially increase our cost of operations, require us to fund environmental indemnities in favor of our secured lenders and reduce our ability to service our secured debt and pay dividends to stockholders and any debt security interest payments.  Environmental problems at any properties could also put us in default under loans secured by those properties, as well as loans secured by unaffected properties.

 

Uninsured losses relating to real property may adversely affect our returns.  

Our leases 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

 

Leveraging our portfolio subjects us to increased risk of loss, including loss of properties in the event of a foreclosure.  

At December 31, 2014, our ratio of total debt to total market capitalization (assuming conversion of OP Units) was approximately 28.5%.  The use of leverage presents an additional element of risk in the event that (1) the cash flow from lease payments on our properties is insufficient to meet debt obligations, (2) we are unable to refinance our debt obligations as necessary or on as favorable terms or (3) there is an increase in interest rates.  If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the property could be foreclosed upon with a consequent loss of income and asset value to us.  Under the “cross-default” provisions contained in mortgages encumbering some of our properties, our default under a mortgage with a lender would result in our default under mortgages held on other properties resulting in multiple foreclosures.

 

We 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 organization documents contain no limitation on the amount or percentage of indebtedness which we may incur.  Therefore, our board of directors, without a vote of the stockholders, could alter the general policy on borrowings at any time.  If our debt capitalization policy were changed, we could become more highly leveraged, resulting in an increase in debt service that could adversely affect our operating cash flow and our ability to make expected distributions to stockholders, and could result in an increased risk of default on our obligations.

 

Covenants in our credit agreements could limit our flexibility and adversely affect our financial condition.

The terms of the Credit Facility 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. The Credit Facility contains 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 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.

 

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Credit market developments may reduce availability under our credit agreements.  

There is risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and/or honoring loan commitments. If our lender(s) fail to honor their legal commitments under our credit facilities, it could be difficult to replace our credit facilities on similar terms. The failure of any of the lenders under the Credit Facility may impact our ability to finance our operating or investing activities.

 

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 and that a court could rule that such agreements are not legally enforceable. 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 and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.

Our charter contains a 9.8% ownership limit. Our charter, subject to certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person to actual or constructive ownership of no more than 9.8% of the value of our outstanding shares of common stock and preferred stock, except that the any member of the Agree-Rosenberg Group (as defined in our charter) (the “Agree-Rosenberg Group”) may own up to 24%. Our board of directors, in its sole discretion, may exempt, subject to the satisfaction of certain conditions, any person from the ownership limit. However, our board of directors may not grant an exemption from the ownership limit to any person whose ownership, direct or indirect, in excess of 9.8% of the value of our outstanding shares of common stock and preferred stock could jeopardize our status as a REIT. These restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT. The ownership limit may delay or impede, and we may use the ownership limit deliberately to delay or impede, a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

 

We have a staggered board. Our directors are divided into three classes serving three-year staggered terms. The staggering of our board of directors may discourage offers for our company or make an acquisition more difficult, even when an acquisition is in the best interest of our stockholders.

 

We have a shareholder rights plan. Under the terms of this plan, we can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock because, unless we approve of the acquisition, after the person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value. This would substantially reduce the value and influence of the stock owned by the acquiring person. Our board of directors can prevent the plan from operating by approving the transaction in advance, which gives us significant power to approve or disapprove of the efforts of a person or group to acquire a large interest in our company.

 

We could issue stock without stockholder approval. Our board of directors could, without stockholder approval, issue authorized but unissued shares of our common stock or preferred stock. In addition, our board of directors could, without stockholder approval, classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares. Our board of directors could establish a series of stock that could, depending on the terms of such series, delay, defer or prevent a transaction or change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

 

Provisions of Maryland law may limit the ability of a third party to acquire control of our company. Certain provisions of Maryland law may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under certain circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then prevailing market price of such shares, including:

 

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·“Business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder and thereafter would require the recommendation of our board of directors and impose special appraisal rights and special stockholder voting requirements on these combinations; and

 

·“Control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

 

The business combination statute permits various exemptions from its provisions, including business combinations that are approved or exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder.  Our board of directors has exempted from the business combination provisions of the 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 any members of the Agree-Rosenberg Group, our other officers, our employees, any of the associates or affiliates of the foregoing and any other person acting in concert of as a group with any of the foregoing. 

 

Additionally, Title 3, Subtitle 8 of the MGCL, permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement takeover defenses. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price.

 

Our charter, our bylaws, the limited partnership agreement of 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 in the best interest of our stockholders.

 

Our board of directors can take many actions without stockholder approval.

Our board of directors has overall authority to oversee our operations and determine our major corporate policies. This authority includes significant flexibility. For example, our board of directors can do the following:

 

·Change our investment and financing policies and our policies with respect to certain other activities, including our growth, debt capitalization, distributions, REIT status and investment and operating policies;
·Within the limits provided in our charter, prevent the ownership, transfer and/or accumulation of shares in order to protect our status as a REIT or for any other reason deemed to be in the best interests of us and our stockholders;
·Issue additional shares without obtaining stockholder approval, which could dilute the ownership of our then-current stockholders;
·Classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares, without obtaining stockholder approval;
·Employ and compensate affiliates;
·Direct our resources toward investments that do not ultimately appreciate over time;
·Change creditworthiness standards with respect to third-party tenants; and
·Determine that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.

 

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Any of these actions could increase our operating expenses, impact our ability to make distributions or reduce the value of our assets without giving our stockholders the right to vote.

 

Future offerings of debt and equity may not be available to us or may adversely affect the market price of our common stock.

We expect to continue to increase our capital resources by making additional offerings of equity and debt securities in the future, which would include classes of preferred stock, common stock and senior or subordinated notes. Our ability to raise additional capital may be adversely impacted by market conditions. Future market dislocations could cause us to seek sources of potentially less attractive capital. All debt securities and other borrowings, as well as all classes of preferred stock, will be senior to our common stock in a liquidation of our company. Additional equity offerings could dilute our stockholders’ equity, and reduce the market price of shares of our common stock. In addition, we may issue preferred stock with a distribution 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:

 

·Changes in interest rates;
·Our financial condition and operating performance and the performance of other similar companies;
·Actual or anticipated variations in our quarterly results of operations;
·The extent of investor interest in our company, real estate generally or commercial real estate specifically;
·The reputation of REITs generally and the attractiveness of their equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income securities;
·Changes in expectations of future financial performance or changes in estimates of securities analysts;
·Fluctuations in stock market prices and volumes; and
·Announcements by us or our competitors of acquisitions, investments or strategic alliances.

 

An officer and director may have interests that conflict with the interests of stockholders.

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 stockholders 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. As a result, the effect of certain transactions on this unit holder may influence our decisions affecting these properties.

 

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 Internal Revenue Code, no assurance can be given that we will remain so qualified.  Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations.  The complexity of these provisions and applicable Treasury Regulations is also increased in the context of a REIT that holds its assets in partnership form.  The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT.  A REIT generally is not taxed at the corporate level on income it distributes to its stockholders, as long as it distributes annually at least 100% of its taxable income to its stockholders.  We have not requested and do not plan to request a ruling from the Internal Revenue Service that we qualify as a REIT.

 

If we fail to qualify as a REIT, we will face tax consequences that will substantially reduce the funds available for payment of cash dividends:

 

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·We would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates.
·We could be subject to the federal alternative minimum tax and possibly increased state and local taxes.
·Unless we are entitled to relief under statutory provisions, we could not elect to be treated as a REIT for four taxable years following the year in which we failed to qualify.

 

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.

 

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 stockholders.

 

An investment in our stock has various tax risks that could affect the value of your investment, including the treatment of distributions in excess of earnings and the inability to apply “passive losses” against distributions.

An investment in our stock has various tax risks. Distributions in excess of current and accumulated earnings and profits, to the extent that they exceed the adjusted basis of an investor’s stock, will be treated as long-term capital gain (or short-term capital gain if the shares have been held for less than one year). Any gain or loss realized upon a taxable disposition of shares by a stockholder who is not a dealer in securities will be treated as a long-term capital gain or loss if the shares have been held for more than one year, and otherwise will be treated as short-term capital gain or loss. Distributions that we properly designate as capital gain distributions will be treated as taxable to stockholders as gains (to the extent that they do not exceed our actual net capital gain for the taxable year) from the sale or disposition of a capital asset held for greater than one year. Distributions we make and gain arising from the sale or exchange by a stockholder of shares of our stock will not be treated as passive income, meaning stockholders generally will not be able to apply any “passive losses” against such income or gain.

 

Excessive non-real estate asset values may jeopardize our REIT status.  

In order to qualify as a REIT, at least 75% of the value of our assets must consist of investments in real estate, investments in other REITs, cash and cash equivalents, and government securities. Therefore, the value of any properties we own that are not considered real estate assets for federal income tax purposes must represent in the aggregate less than 25% of our total assets. In addition, under federal income tax law, we may not own securities in any one issuer (other than a REIT, a qualified REIT subsidiary or a TRS) which represent in excess of 10% of the voting securities or 10% of the value of all securities of any one issuer, or which have, in the aggregate, a value in excess of 5% of our total assets, and we may not own securities of one or more TRSs which have, in the aggregate, a value in excess of 25% of our total assets.  We may invest in securities of another REIT, and our investment may represent in excess of 10% of the voting securities or 10% of the value of the securities of the other REIT. If the other REIT were to lose its REIT status during a taxable year in which our investment represented in excess of 10% of the voting securities or 10% of the value of the securities of the other REIT as of the close of a calendar quarter, we may lose our REIT status.

 

Compliance with the asset tests is determined at the end of each calendar quarter. Subject to certain mitigation provisions, if we fail to meet any such test at the end of any calendar quarter, we will cease to qualify as a REIT.

 

We may have to borrow funds or sell assets to meet our distribution requirements.  

Subject to some adjustments that are unique to REITs, a REIT generally must distribute 90% of its taxable income. For the purpose of determining taxable income, we may be required to accrue interest, rent and other items treated as earned for tax purposes but that we have not yet received. In addition, we may be required not to accrue as expenses for tax purposes some items which actually have been paid, including, for example, payments of principal on our debt, or some of our deductions might be disallowed by the Internal Revenue Service. As a result, we could have taxable income in excess of cash available for distribution. If this occurs, we may have to borrow funds or liquidate some of our assets in order to meet the distribution requirement applicable to a REIT.

 

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Future distributions may include a significant portion as a return of capital.

Our distributions may exceed the amount of our income as a REIT. If so, the excess distributions will be treated as a return of capital to the extent of the stockholder’s basis in our stock, and the stockholder’s basis in our stock will be reduced by such amount. To the extent distributions exceed a stockholder’s basis in our stock; the stockholder will recognize capital gain, assuming the stock is held as a capital asset.

 

Our ownership of and relationship with 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 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. A TRS will typically pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. 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 25% 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 qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property. For example, we will be subject to income tax to the extent we distribute less than 100% of our REIT taxable income (including capital gains). Additionally, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. While we will undertake sales of assets if those assets become inconsistent with our long-term strategic or return objectives, we do not believe that those sales should be considered prohibited transactions, but there can be no assurance that the 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 stockholders.

 

Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations.

The maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our stock.

 

Our ownership limit contained in our charter may be ineffective to preserve our REIT status.

In order for us to qualify as a REIT for each taxable year, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year (the “5/50 Rule”). Individuals for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. In order to preserve our REIT qualification, our charter generally prohibits (i) any member of the Agree-Rosenberg Group from directly or indirectly owning more than 24% of the value of our outstanding stock and (ii) any other person from directly or indirectly owning more than 9.8% of the value of our outstanding common stock and preferred stock, subject to certain exceptions. Because of the way our ownership limit is written, including because the limit on persons other than a member of the Agree-Rosenberg Group is not less than 9.8%, our charter limitation may be ineffective to ensure that we do not violate the 5/50 Rule.

 

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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 Internal Revenue Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute qualifying income for purposes of income tests that apply to us as a REIT. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRSs.

 

Item 1B:              Unresolved Staff Comments

 

There are no unresolved staff comments.

 

Item 2:                 Properties

 

As of December 31, 2014, our portfolio consisted of 209 properties located in 37 states and totaling approximately 4.3 million square feet of gross leasable area. Our portfolio included 203 net lease properties, which contributed approximately 91.6% of annualized base rent, and six community shopping centers, which generated the remaining 8.4% of annualized base rent.

 

As of December 31, 2014, our portfolio was approximately 98.6% leased and had a weighted average remaining lease term of approximately 11.9 years. A significant majority of our properties are leased to national tenants and approximately 55.8% 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, 2014:

 

($ in thousands)                    
   Number of   Annualized   % of Ann.   % IG   Wtd. Avg. 
Property Type  Properties   Base Rent (1)   Base Rent   Rated (2)   Lease Term 
Retail Net Lease   180   $45,834    81.1%   56.0%   12.3 yrs 
Retail Net Lease (ground leases)   23    5,941    10.5%   89.1%   14.7 yrs 
Total Retail Net Lease   203   $51,775    91.6%   59.8%   12.6 yrs 
Community Shopping Centers   6    4,729    8.4%   11.8%   4.9 yrs 
Total Portfolio   209   $56,504    100.0%   55.8%   11.9 yrs 

 

(1)Represents annualized straight-line rent as of December 31, 2014.
(2)Reflects tenants, or parent entities thereof, with investment grade credit ratings from S&P, Moody's, Fitch and/or NAIC.
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Tenant Diversification

The following table presents annualized base rents for all tenants that generated 2.0% or greater of our total annualized base rent as of December 31, 2014:

  

($ in thousands)        
   Annualized   % of Ann. 
Tenant / Concept  Base Rent (1)   Base Rent 
Walgreens  $12,362    21.9%
Wawa   2,465    4.4%
CVS   2,463    4.4%
Wal-Mart   2,039    3.6%
Rite Aid   1,962    3.5%
Lowe's   1,846    3.3%
LA Fitness   1,694    3.0%
Kmart   1,618    2.9%
Taco Bell (2)   1,537    2.7%
Academy Sports   1,340    2.4%
Burger King (3)   1,241    2.2%
Kohl's   1,180    2.1%
AutoZone   1,163    2.1%
Total  $32,910    58.5%

 

(1)Represents annualized straight-line rent as of December 31, 2014.
(2)Franchise restaurants operated by Charter Foods North, LLC.
(3)Franchise restaurants operated by Meridian Restaurants.

 

Significant Tenants

Walgreens operates the largest drugstore chain in the United States and trades, through its holding company Walgreens Boot Alliance, Inc., on the Nasdaq stock exchange under the symbol “WBA”. For its fiscal year ended August 31, 2014, Walgreens had total assets of approximately $37.2 billion, annual net sales of $76.4 billion, annual net income of $1.9 billion and shareholders’ equity of $20.6 billion. As of August 31, 2014, Walgreens operated 8,309 locations in 50 states, the District of Columbia, Puerto Rico and U.S. Virgin Islands.

 

On December 31, 2014, Walgreens and Alliance Boots GmbH completed a merger to form Walgreens Boots Alliance, Inc. Under a reorganization merger agreement approved by Walgreens shareholders, Walgreens became a wholly owned subsidiary of Walgreens Boots Alliance, Inc. and existing shares of Walgreens common stock were converted automatically into shares of Walgreens Boots Alliance common stock on a one-for-one basis.

 

The information set forth above was derived from the annual report on Form 10-K filed by Walgreens with respect to their 2014 fiscal year and the current report on Form 8-K filed by Walgreens Boot Alliance, Inc. with respect to the merger agreement. 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.

 

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Tenant Sector Diversification

The following table presents annualized base rents for our top retail sectors as of December 31, 2014:

 

($ in thousands)        
   Annualized   % of Ann. 
Tenant Sector  Base Rent (1)   Base Rent 
Pharmacy  $16,788    29.7%
Restaurants - Quick Service   4,247    7.5%
Apparel   3,423    6.1%
Warehouse Clubs   2,957    5.2%
Sporting Goods   2,736    4.8%
Convenience Stores   2,599    4.6%
Health & Fitness   2,546    4.5%
Grocery Stores   2,426    4.3%
General Merchandise   2,006    3.6%
Restaurants - Casual Dining   1,848    3.3%
Home Improvement   1,846    3.3%
Financial Services   1,693    3.0%
Other (2)   11,389    20.1%
Total  $56,504    100.0%

 

(1)Represents annualized straight-line rent as of December 31, 2014.
(2)Includes sectors generating less than 3.0% of annualized base rent.

 

Geographic Diversification

The following table presents annualized base rents, by state, for our portfolio as of December 31, 2014:

 

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($ in thousands)

 

   Annualized   % of Ann. 
Tenant Sector  Base Rent (1)   Base Rent 
Michigan  $15,718    27.8%
Florida   6,899    12.2%
Ohio   3,516    6.2%
Illinois   3,269    5.8%
Pennsylvania   2,796    4.9%
Georgia   1,780    3.2%
North Carolina   1,747    3.1%
Texas   1,529    2.7%
New York   1,551    2.7%
Missouri   1,411    2.5%
Kansas   1,273    2.3%
California   1,238    2.2%
North Dakota   1,222    2.2%
Indiana   1,201    2.2%
Oregon   1,134    2.0%
Tennessee   1,063    1.9%
Virginia   1,038    1.8%
South Carolina   977    1.7%
Colorado   821    1.5%
Utah   756    1.3%
Minnesota   637    1.1%
Kentucky   634    1.1%
New Jersey   590    1.0%
Alabama   523    0.9%
Louisiana   396    0.7%
Connecticut   403    0.7%
Washington   339    0.6%
Delaware   326    0.6%
South Dakota   326    0.6%
Maryland   277    0.5%
Nevada   224    0.4%
Wisconsin   204    0.4%
Arizona   175    0.3%
Montana   184    0.3%
Mississippi   151    0.3%
Oklahoma   96    0.2%
Nebraska   80    0.1%
Total  $56,504    100.0%

 

(1) Represents annualized straight-line rent as of December 31, 2014.

  

Lease Expirations

The following table presents contractual lease expirations within the Company’s portfolio as of December 31, 2014, assuming that no tenants exercise renewal options:

 

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(in thousands)

 

       Annualized Base Rent (1)   Gross Leasable Area 
           % of       % of 
Year  Leases   Amount   Total   Amount   Total 
2015   7   $726    1.3%   152    3.5%
2016   9    318    0.6%   35    0.8%
2017   12    1,867    3.3%   134    3.1%
2018   16    2,085    3.7%   305    7.1%
2019   15    3,738    6.6%   344    8.0%
2020   15    2,740    4.8%   321    7.4%
2021   15    4,256    7.5%   256    5.9%
2022   12    2,605    4.6%   257    6.0%
2023   15    2,419    4.3%   221    5.1%
2024   12    3,095    5.5%   210    4.9%
Thereafter   135    32,655    57.8%   2,080    48.2%
Total   263   $56,504    100.0%   4,315    100.0%

 

(1)Represents annualized straight-line rent as of December 31, 2014.

 

Community Shopping Centers

Our six community shopping centers range in size from 20,000 to 241,458 square feet of GLA. Our community shopping centers are anchored by national tenants.

 

The location and primary occupancy information with respect to the community shopping centers as of December 31, 2014 are set forth below:

 

      Year  Gross       Annualized   Percent   Anchor Tenants
      Completed /  Leasable   Annualized   Base Rent   Leased at   (Lease Expiration /
Property  Location  Renovated  Area (Sq. Ft.)   Base Rent (1)   per Sq. Ft (2)   December 31, 2014   Option Expiration) (3)
Capital Plaza  Frankfort, KY  1978 / 2006   116,212   $634,000   $5.46    100%  Kmart (2018 / 2053)
                             Walgreens (2032 / 2052)
                              
Marshall Plaza  Marshall, MI  1990   119,479   $701,601   $5.87    100%  Kmart (2020 / 2065)
                              
Central Michigan Commons  Mt. Pleasant, MI  1973 / 1997   241,458   $927,495   $4.50    85%  Kmart (2018 / 2048)
                             JC Penney (2015 / 2035)
                             Staples (2020 / 2030)
                              
North Lakeland Plaza  Lakeland, FL  1987   171,397   $1,339,945   $7.82    100%  Best Buy (2021 / 2028)
                             Beall's (2020 / 2035)
                              
Ferris Commons  Big Rapids, MI  1990   169,524   $1,016,993   $6.00    100%  Kmart (2015 / 2065)
                             MC Sports (2018 / 2033)
                              
West Frankfort Plaza  West Frankfort, IL  1982   20,000   $108,586   $6.79    80%   
                              
Totals         838,070   $4,728,620   $5.64    95%   

 

(1)Represents annualized straight-line rent as of December 31, 2014.
(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.

 

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Item 3: Legal Proceedings

 

From time to time, we are involved in legal proceedings in the ordinary course of business. We are not presently involved in any litigation nor, to our knowledge, is any other litigation threatened against us, other than routine litigation arising in the ordinary course of business, which is expected to be covered by our liability insurance and all of which collectively is not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.

 

Item 4: 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.

 

           Dividends 
Quarter Ended  High   Low   Declared 
March 31, 2014  $31.67   $28.17   $0.43 
June 30, 2014  $31.22   $29.22   $0.43 
September 30, 2014  $30.82   $27.38   $0.43 
December 31, 2014  $31.63   $27.09   $0.45 
                
March 31, 2013  $30.10   $26.89   $0.41 
June 30, 2013  $33.85   $28.75   $0.41 
September 30, 2013  $32.48   $26.81   $0.41 
December 31, 2013  $32.16   $27.77   $0.41 

 

On February 27, 2015, the reported closing sale price per share of common stock on the NYSE was $32.83.

 

At February 27, 2015, there were 17,617,747 shares of our common stock issued and outstanding which were held by approximately 139 stockholders of record. The number of stockholders of record does not reflect persons or entities that held their shares in nominee or “street” name. In addition, at February 27, 2015 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 2014, we paid $1.74 per share of common stock in dividends. Of the $1.74, 80.35% represented ordinary income, and 19.65% represented return of capital, for tax purposes. For 2013, we paid $1.64 per share of common stock in dividends. Of the $1.64, 83.7% represented ordinary income, and 16.3% represented return of capital, for tax purposes.

 

We intend to continue to declare quarterly dividends to our stockholders. However, our distributions are determined by our board of directors and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue 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 stockholders, 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 stockholders 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 stockholders on December 31 of the year in which they are declared. In addition, at our election, a distribution for a taxable year may be declared in the following taxable year if it is declared before we timely file our tax return for such year and if paid on or before the first regular dividend payment after such declaration. These distributions qualify as dividends paid for the 90% REIT distribution test for the previous year and are taxable to holders of our capital stock in the year in which paid.

 

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During the year ended December 31, 2014, we did not sell any unregistered securities. During the fourth quarter of 2014, we did not repurchase any of our equity securities.

 

For information about our equity compensation plan, please see Part III, Item 12 of this Annual Report on Form 10-K.

 

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, 2010 through 2014 and operating data for each of the periods presented were derived from our audited financial statements.

 

Selected Financial Data

 

(in thousands, except per share information and other data)

 

   Year Ended December 31, 
   2014   2013   2012   2011   2010 
Operating Data                         
Total revenues  $53,559   $43,518   $34,624   $30,263   $26,235 
Expenses                         
Property costs (1)   4,917    3,656    3,328    3,469    2,730 
General and administrative   6,629    5,952    5,682    5,662    5,003 
Interest   8,587    6,475    5,134    3,957    3,461 
Depreciation and amortization   11,103    8,489    6,241    5,200    4,119 
Impairments   3,020    -    -    600    6,160 
Total Expenses   34,256    24,572    20,385    18,888    21,473 
Income From Operations   19,303    18,946    14,239    11,375    4,762 
Gain on extinguishment of debt   -    -    -    2,360    - 
Loss on sale of assets   (528)   -    -    -    - 
Income From Continuing Operations   18,775    18,946    14,239    13,735    4,762 
Gain on sale of asset from discontinued operations   123    946    2,097    110    4,738 
Income (loss) from discontinued operations   15    298    2,267    (3,956)   6,128 
Net income   18,913    20,190    18,603    9,889    15,628 
Less net income attributable to non-controlling interest   425    515    554    338    561 
Net income attributable to Agree Realty Corporation  $18,488   $19,675   $18,049   $9,551   $15,067 
Share Data                         
Weighted average common shares - diluted   14,967    13,158    11,137    9,681    9,191 
Net income per share - diluted  $1.24   $1.50   $1.62   $0.99   $1.64 
Cash dividends per share  $1.74   $1.64   $1.60   $1.60   $2.04 
Balance Sheet Data                         
Real Estate (before accumulated depreciation)  $589,147   $471,366   $398,812   $340,074   $338,221 
Total Assets  $593,580   $462,742   $370,093   $293,944   $285,042 
Total Debt, including accrued interest  $222,483   $158,869   $161,242   $120,032   $100,128 
Other Data                         
Number of Properties   209    130    109    87    81 
Gross Leasable Area (Sq. Ft.)   4,315,000    3,662,000    3,259,000    3,556,000    3,848,000 
Percentage Leased   99%   98%   98%   93%   99%

 

(1)Property costs include real estate taxes, insurance, maintenance and land lease expense.

 

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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 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 98.06% interest as of December 31, 2014.

 

As of December 31, 2014, our portfolio consisted of 209 properties located in 37 states and totaling approximately 4.3 million square feet of gross leasable area. As of December 31, 2014, our portfolio was approximately 98.6% leased and had a weighted average remaining lease term of approximately 11.9 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 have 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 April 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-08 "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" which updates ASC 205 "Presentation of Financial Statements" and ASC 360 "Property, Plant and Equipment.” The amendments in this update change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. For public entities, ASU 2014-08 is effective prospectively for fiscal years beginning after December 15, 2015; however, early adoption is permitted, but only for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issuance. We have elected to early adopt this updated standard effective in the first quarter of 2014. The adoption of this guidance had an effect on the presentation of our consolidated financial statements. Beginning in 2014, activities related to individual sales of properties are generally no longer classified as discontinued operations except for the property classified as held for sale as of December 31, 2013.

 

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09 “Revenue from Contracts with Customers” as a new Topic, Accounting Standards Codification ("ASC") Topic 606. The objective of ASU 2014-19 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that a company 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. In applying the new standard, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC, including revenue from leases. This ASU is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 and shall be applied using either a full retrospective or modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the new guidance and has not determined the impact, if any, this standard may have on the consolidated financial statements.

 

Critical Accounting Policies

Our accounting policies are determined in accordance with U.S. generally accepted accounting principles (“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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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 us as a result of 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 generally ranges from 30 to 40 years for buildings and 10 to 20 years for improvements.

 

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, 2014 to Year Ended December 31, 2013

 

Minimum rental income increased $8,508,000, or 21%, to $49,403,000 in 2014, compared to $40,895,000 in 2013. Approximately $6,809,000 of the increase is due to the acquisition of 77 properties in 2014 and the full year impact of 18 properties acquired in 2013. Approximately $2,158,000 of the increase is attributable to five development projects completed in 2014 and the full year impact of six development projects completed in 2013. These increases were partially offset by approximately $341,000 due to a reduction in minimum rental income from properties sold during 2014 that were owned for all of 2013, and approximately $101,000 due to other minimum rental income adjustments.

 

Percentage rents increased to $160,000 in 2014 from $36,000 in 2013. The primary driver of the increase is properties acquired in 2013 for which we received percentage rent in 2014.

 

Operating cost reimbursements increased $1,257,000, or 49%, to $3,825,000 in 2014, compared to $2,567,000 in 2013. Operating cost reimbursements increased due to higher levels of recoverable property operating expenses as a result of our 2014 and 2013 acquisition and development activity. Our portfolio recovery rate increased to 86.1% in 2014 compared to 79.5% in 2013.

 

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Other income increased to $171,000 in 2014 from $19,000 in 2013. The primary driver of the increase is non-recurring fee income earned in 2014.

 

Real estate taxes increased $730,000, or 36%, to $2,766,000 in 2014, compared to $2,035,000 in 2013. The increase is due to the ownership of additional properties in 2014 compared to 2013 for which we remit real estate taxes and are subsequently reimbursed by tenants.

 

Property operating expenses increased $486,000, or 41%, to $1,679,000 in 2014, compared to $1,193,000 in 2013. The increase is primarily due to the ownership of additional properties in 2014 compared to 2013 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 $44,000, or 10%, to $472,000 in 2014, compared to $428,000 for 2013. The increase is the result a property acquired in 2014 that is subject to a land lease.

 

General and administrative expenses increased $677,000, to $6,629,000 in 2014, compared to $5,952,000 in 2013. The increase is primarily the result of increased employee costs of $582,000 and a net increase in other expenses of $66,000. General and administrative expenses as a percentage of total revenue decreased to 12.4% for 2014 from 13.7% in 2013.

 

Depreciation and amortization increased $2,613,000, or 31%, to $11,103,000 in 2014, compared to $8,489,000 in 2013. The increase was primarily the result of the acquisition of 77 properties in 2014 and 18 properties in 2013.

 

We recognized impairment charges of $3,020,000 in 2014, including (i) $220,000 as a result of writing down the carrying value of Petoskey Town Center, which was under contract for sale, but not classified as held for sale at September 30, 2014 due to contingencies associated with the contract and (ii) $2,800,000 as a result of writing down the carrying value of Chippewa Commons due to an anchor tenant declining to exercise an extension option which would contribute to vacancy and diminished cash flows and resulted in a fair value that was less than the net book value of the asset. We recognized an impairment charge of $450,000 in 2013 as a result of writing down the carrying value of Ironwood Commons, which was under contract for sale, but not classified as held for sale at September 30, 2013 due to contingencies associated with the contract. This amount is reflected in discontinued operations in 2013.

 

Interest expense increased $2,112,000, or 33%, to $8,587,000 in 2014, from $6,475,000 in 2013. The increase in interest expense is a result of higher levels of borrowings to finance the acquisition and development of additional properties in 2014 and 2013, including a $65,000,000 unsecured term loan entered into in July of 2014 and a $35,000,000 unsecured term loan entered into in September of 2013.

 

We recognized a net loss on sales of assets of $528,000 in 2014 which was attributable primarily to a $234,000 loss on the sale of Chippewa Commons in December 2014 and a $276,000 loss on the sale of a property in East Lansing, Michigan in August 2014 (the property was subject to a purchase option exercised by the lessee). We also recognized a gain of $123,000 on the sale of the Ironwood Commons in January 2014. This gain is reflected in discontinued operations in 2014. In 2013, we recognized a gain of $946,000 on the sale of a Walgreens in Ypsilanti, Michigan. This gain is reflected in discontinued operations in 2013.

 

Income from discontinued operations was $15,000 in 2014 compared to $298,000 in 2013. Income from discontinued operations in 2014 was attributable to Ironwood Commons which was classified as held for sale at December 31, 2013 and subsequently sold in January 2014. Income from discontinued operations in 2013 was attributable to Ironwood Commons, inclusive of the $450,000 impairment charge described above, and a Walgreens in Ypsilanti, Michigan that was sold in January 2013.

 

Our net income decreased $1,277,000, or 6%, to $18,913,000 in 2014, from $20,190,000 in 2013 as a result of the foregoing factors.

 

Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012

 

Minimum rental income increased $8,326,000, or 26%, to $40,895,000 in 2013, compared to $32,569,000 in 2012. Approximately $7,002,000 of the increase was due to the acquisition of 18 properties in 2013 and the full year impact of 25 properties acquired in 2012. Approximately $1,185,000 of the increase was attributable to six development projects completed in 2013 and the full year impact of two development projects completed in 2012. Additionally, minimum rental income increased by approximately $139,000 as a result of other rent adjustments.

 

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Percentage rents increased to $36,000 in 2013 from $24,000 in 2012.

 

Operating cost reimbursements increased $596,000, or 30%, to $2,567,000 in 2013, compared to $1,971,000 in 2012. Operating cost reimbursements increased due to higher levels of recoverable property operating expenses as a result of our 2013 and 2012 acquisition and development activity. Our portfolio recovery rate increased to 79.5% in 2013 compared to 71.6% in 2012.

 

Other income decreased to $19,000 in 2013 compared to $60,000 in 2012. The primary driver of the decrease was non-recurring fee income earned in 2012.

 

Real estate taxes increased $249,000, or 14%, to $2,035,000 in 2013, compared to $1,786,000 in 2012. The increase is due to the ownership of additional properties in 2013 compared to 2012 for which we remit real estate taxes and are subsequently reimbursed by tenants.

 

Property operating expenses increased $225,000, or 23%, to $1,193,000 in 2013, compared to $968,000 in 2012. The increase is primarily due to the ownership of additional properties in 2013 compared to 2012 which contributed to higher property maintenance, utilities and insurance expenses. Our tenants subsequently reimbursed us for the majority of these expenses.

 

Land lease payments decreased $146,000, or 25%, to $428,000 in 2013 compared to $574,000 for 2012. The decrease is the result of our purchase of the underlying land at our property in Ann Arbor, Michigan in June 2012.

 

General and administrative expenses increased $270,000, to $5,952,000 in 2013 compared to $5,682,000 in 2012. The increase in general and administrative expenses was primarily the result of increased employee costs of $196,000, increased professional fees of $99,000, offset by net decreases in other expenses of $25,000. General and administrative expenses as a percentage of total revenue decreased to 13.7% for 2013 from 16.4% in 2012.

 

Depreciation and amortization increased $2,248,000, or 36%, to $8,489,000 in 2013 compared to $6,241,000 in 2012. The increase was primarily the result of the acquisition of 18 properties in 2013 and 25 properties in 2012.

 

Interest expense increased $1,341,000, or 26%, to $6,475,000 in 2013, from $5,134,000 in 2012. The increase in interest expense was a result of higher levels of borrowings to finance the acquisition and development of additional properties in 2013 and 2012, including a $35,000,000 unsecured term loan entered into in September of 2013, a $25,000,000 secured term loan entered into in December 2012 and a $23,600,000 Commercial Mortgage Backed Security “CMBS” financing that closed in December 2012.

 

In 2013, we recognized a gain of $946,000 on the sale of a Walgreens in Ypsilanti, Michigan. This gain is reflected in discontinued operations in 2013. In 2012 we recognized a net gain of $2,097,000 on the sale of six assets, including a vacant single tenant office property, two vacant single tenant retail properties, a Kmart-anchored shopping center in Charlevoix, Michigan, a Kmart-anchored shopping center in Plymouth, Wisconsin and a Kmart-anchored shopping center in Shawano, Wisconsin.

 

Income from discontinued operations was $298,000 in 2013 compared to $2,267,000 in 2012. Income from discontinued operations in 2013 was attributable to Ironwood Commons, inclusive of a $450,000 impairment charge, and a Walgreens in Ypsilanti, Michigan that was sold in January 2013. Income from discontinued operations in 2012 was attributable to six properties that were sold during 2012, four former Borders properties that were conveyed to the lender in March 2012, and a Walgreens in Ypsilanti, Michigan which was classified as held for sale at December 31, 2012 and subsequently sold in January 2013.

 

Our net income increased $1,586,000, or 9%, to $20,190,000 in 2013, from $18,604,000 in 2012 as a result of the foregoing factors.

 

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.

 

26
 

 

We expect to meet our short term liquidity requirements through cash provided from operations and borrowings under our Credit Facility. As of December 31, 2014, $15,000,000 was outstanding on our Credit Facility and $135,000,000 was available for future borrowings. We anticipate funding our long term capital needs through cash provided from operations, borrowings under our Credit Facility, the issuance of long term debt or the issuance of common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity.

 

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.

 

Capitalization

As of December 31, 2014, our total market capitalization was approximately $777,887,000. Market capitalization consisted of $556,124,000 of common equity (based on the December 31, 2014 closing price on the NYSE of $31.09 per common share and assuming the conversion of OP Units) and $221,762,200 of total debt including (i) $106,762,000 of mortgage notes payable; (ii) $100,000,000 of unsecured term loans; and (iii) $15,000,000 of borrowings under our Credit Facility. Our ratio of total debt to total market capitalization was 28.5% at December 31, 2014.

 

At December 31, 2014, the non-controlling interest in our Operating Partnership represented ownership of 1.94% of the Operating Partnership. 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 17,887,565 shares of common stock outstanding at December 31, 2014.

 

Debt

Revolving Credit and Term Loan Facility

In July 2014, the Company entered into a $250,000,000 senior unsecured revolving credit and term loan agreement consisting of (i) a new $150,000,000 revolving credit facility (the “Credit Facility”); (ii) a new $65,000,000 seven-year unsecured term loan facility (the “2021 Term Loan”); and (iii) our existing $35,000,000 unsecured term loan facility due 2020 (the “2020 Term Loan”). The Credit Facility, 2021 Term Loan and 2020 Term Loan, together, are referred to as our “Revolving Credit and Term Loan Facility”.

 

The Credit Facility is due July 21, 2018, with an additional one-year extension at the Company’s option, subject to customary conditions. Borrowings under the Credit Facility are priced at LIBOR plus 135 to 200 basis points, depending on the Company’s leverage. As of December 31, 2014, $15,000,000 was outstanding under the Credit Facility bearing a weighted average interest rate of approximately 1.5% and $135,000,000 was available for borrowing.

 

The 2021 Term Loan matures on July 21, 2021. Borrowings under the 2021 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the Company’s leverage. The Company entered into interest rate swaps to fix LIBOR at 2.09% until maturity, implying an all-in interest rate of 3.74% at closing. As of December 31, 2014, $65,000,000 was outstanding under the 2021 Term Loan.

 

The 2020 Term Loan matures on September 29, 2020. Borrowings under the 2020 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the Company’s leverage. The Company entered into interest rate swaps to fix LIBOR at 2.20% until maturity, implying an all-in interest rate of 3.85% at closing. As of December 31, 2014, $35,000,000 was outstanding under the 2020 Term Loan.

 

The Revolving Credit and Term Loan Facility contains customary covenants, including, among others, financial covenants regarding debt levels, total liabilities, tangible net worth, fixed charge coverage, unencumbered borrowing base properties, and permitted investments. The Company was in compliance with the covenant terms at December 31, 2014.

 

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Mortgage Notes Payable

As of December 31, 2014, we had total mortgage indebtedness of $106,762,000 with a weighted average maturity of 5.1 years. Including our mortgages that have been swapped to a fixed interest rate, our weighted average interest rate on mortgage debt was 4.27%.

 

($ in thousands)

 

   Interest      Principal Amount Outstanding 
Mortgage Note Payable  Rate (1)   Maturity  December 31, 2014   December 31, 2013 
Portfolio Mortgage Loan due 2016   6.56%  June 2016  $8,580   $8,580 
Portfolio Mortgage Loan due 2017  6.63%  February 2017   2,406    3,405 
Secured Term Loan due 2017   3.62%  May 2017 (2)   21,398    22,018 
Secured Term Loan due 2018   2.49%  April 2018   25,000    25,000 
Portfolio Mortgage Loan due 2020   6.90%  January 2020   7,896    9,150 
Single Asset Mortgage Loan due 2020   6.24%  January 2020   3,204    3,275 
CMBS Portfolio Loan due 2023   3.60%  January 2023   23,640    23,640 
Single Asset Mortgage Loan due 2023   5.01%  September 2023   5,595    - 
Portfolio CTL due 2026   6.27%  July 2026   9,043    9,558 
Single Asset Mortgage Loan due 2014   4.16%  June 2014   -    9,272 
Total          $106,762   $113,898 

 

(1)Fixed rates, including the effect of interest rate swaps.

(2)The note matures May 14, 2017 and may be extended, at the Company’s election, for a two-year term to May 2019, subject to certain conditions.

 

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 a material misrepresentation, misstatement or omission by the borrower, intentional 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, 2014, the mortgage loan of $21,398,000 was partially recourse to us and secured by a limited guaranty of payment and performance for approximately 50% of the loan amount.

 

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 as of December 31, 2014:

 

($ in thousands)

 

   Total   Yr 1   2-3 Yrs   4-5 Yrs   Over 5 Yrs 
Mortgage Notes Payable  $106,762   $3,839   $35,327   $30,326   $37,270 
Revolving Credit Facility   15,000    -    -    15,000    - 
Unsecured Term Loans   100,000    -    -    -    100,000 
Land Lease Obligations   11,401    515    1,029    1,031    8,826 
Estimated Interest Payments on Mortgage Notes Payable and Unsecured Term Loans   44,164    8,270    14,567    11,625    9,702 
Total  $277,327   $12,624   $50,923   $57,982   $155,798 

 

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, 2014, we declared a quarterly dividend of $0.45 per share. The cash dividend was paid on January 6, 2015 to holders of record on December 23, 2014.

 

During the quarter ending March 31, 2015, we declared a quarterly dividend of $0.45 per share. The cash dividend will be paid on April 14, 2014 to holders of record on March 31, 2014.

 

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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 as an alternative to net income as the primary indicator of the Company’s operating performance, or as 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 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, 2014, 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 FFO and net income for the years ended December 31, 2014, 2013 and 2012:

 

   Year Ended 
Reconciliation of Funds from Operations to Net Income  December 31, 2014   December 31, 2013   December 31, 2012 
Net income  $18,913,008   $20,189,611   $18,603,594 
Depreciation of real estate assets   8,361,698    6,930,145    5,726,319 
Amortization of leasing costs   125,946    113,101    106,100 
Amortization of lease intangibles   2,490,585    1,633,691    1,025,077 
Impairment charge   3,020,000    450,000    - 
(Gain) loss on sale of assets   404,996    (946,347)   (2,097,105)
Funds from Operations  $33,316,233   $28,370,201   $23,363,985 
                
Funds from Operations Per Share - Diluted  $2.18   $2.10   $2.03 
                
Weighted average shares and OP units outstanding               
Basic   15,230,205    13,413,526    11,418,937 
Diluted   15,314,514    13,505,124    11,484,529 

  

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The following table provides a reconciliation of AFFO and net income for the years ended December 31, 2014, 2013 and 2012:

  

   Year Ended 
Reconciliation of Adjusted Funds from Operations to Net Income  December 31, 2014   December 31, 2013   December 31, 2012 
Net income  $18,913,008   $20,189,611   $18,603,594 
Cumulative adjustments to calculate FFO   14,403,225    8,180,590    4,760,391 
Funds from Operations  $33,316,233   $28,370,201   $23,363,985 
Straight-line accrued rent   (1,415,739)   (1,148,462)   (738,118)
Deferred revenue recognition   (463,380)   (463,380)   (463,380)
Stock based compensation expense   1,986,835    1,812,532    1,657,209 
Amortization of financing costs   398,248    326,238    285,385 
Non-Real Estate Depreciation   122,861    66,596    65,962 
Adjusted Funds from Operations  $33,945,058   $28,963,725   $24,171,043 
                
Additional supplemental disclosure               
Scheduled principal repayments  $3,599,130   $3,478,384   $3,164,654 
Capitalized interest  $263,472   $566,753   $149,054 
Capitalized building improvements  $145,274   $87,018   $170,858 

 

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.

 

   2015   2016   2017   2018   2019   Thereafter   Total 
Mortgage Notes Payable  $3,839   $12,674   $22,653   $27,575   $2,750   $37,271   $106,762 
Average Interest Rate   5.36%   6.13%   6.43%   3.94%   2.86%   4.50%     
                                    
Unsecured Revolving Credit Facility  $-   $-   $-   $15,000   $-   $-   $15,000 
Average Interest Rate                  1.52%               
                                    
Unsecured Term Loans  $-   $-   $-   $-   $-   $100,000   $100,000 
Average Interest Rate                            3.78%   - 

 

The fair value (in thousands) is estimated at $107,814 and $97,919 for mortgage notes payable and unsecured term loan, respectively, as of December 31, 2014.

 

The table above incorporates those exposures that exist as of December 31, 2014; 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, we entered into a forward starting interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $22,300,000 in variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 1.92%. This swap effectively converted $22,300,000 of variable-rate borrowings to fixed-rate borrowings from July 1, 2013 to May 1, 2019. As of December 31, 2014, this interest rate swap was valued as a liability of $425,000.

 

30
 

  

In December 2012, we entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $25,000,000 in variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 0.89%. This swap effectively converted $25,000,000 of variable-rate borrowings to fixed-rate borrowings from December 6, 2012 to April 4, 2018. As of December 31, 2014, this interest rate swap was valued as an asset of $274,000.

 

In September 2013, we entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35,000,000 in variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 2.20%. This swap effectively converted $35,000,000 of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of December 31, 2014, this interest rate swap was valued as a liability of $911,000.

 

In July 2014, we entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65,000,000 in variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 2.09%. This swap effectively converted $65,000,000 of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of December 31, 2014, this interest rate swap was valued as a liability of $1,047,000.

 

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, 2014.

 

As of December 31, 2014, a 100 basis point increase in interest rates on the portion of our debt bearing interest at variable rates would result in an increase in interest expense of approximately $150,000.

 

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Item 8: Financial Statements and Supplementary Data

 

The financial statements and supplementary data are listed in the Index to Financial Statements and Financial Statement Schedules appearing on Page F-1 of this 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

 

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 Securities Exchange Act). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

 

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:

 

1)Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the 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 Commission. Based on our assessment and those criteria, our management believes that we maintained effective internal control over financial reporting as of December 31, 2014.

 

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.

 

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PART III

 

Item 10: Directors, Executive Officers and Corporate Governance

 

Incorporated herein by reference to our definitive proxy statement with respect to our 2015 Annual Meeting of Stockholders.

 

Item 11: Executive Compensation

 

Incorporated herein by reference to our definitive proxy statement with respect to our 2015 Annual Meeting of Stockholders.

 

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table summarizes the equity compensation plan under which our common stock may be issued as of December 31, 2014.

 

   Number of Securities to be
Issued Upon Exercise of
Outstanding Options, Warrants
and Rights		   Weighted Average Exercise
Price of Outstanding Options,
Warrant and Rights		   Number of Securities
Remaining Available for Future
Issuance Under Equity
Compensation Plans
(Excluding Securities Reflected
in Column (a))		 
Plan Category  (a)   (b)   (c) 
Equity Compensation Plans Approved by Security Holders   -    -    620,071(1)
Equity Compensation Plans Not Approved by Security Holders   -    -    - 
                
Total   -    -    620,071 

 

(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 is incorporated herein by reference to our definitive proxy statement with respect to our 2015 Annual Meeting of Stockholders.

 

Item 13: Certain Relationships, Related Transactions and Director Independence

 

Incorporated herein by reference to our definitive proxy statement with respect to our 2015 Annual Meeting of Stockholders.

 

Item 14: Principal Accounting Fees and Services

 

Incorporated herein by reference to our definitive proxy statement with respect to our 2015 Annual Meeting of Stockholders.

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PART IV

 

Item 15: Exhibits and Financial Statement Schedules

 

A.   The following documents are filed as part of this Annual Report on Form 10-K:
  1 - 2. The financial statements and supplementary data are listed in the Index to Financial Statements and Financial Statement Schedules appearing on Page F-1 of this Annual Report on Form 10-K.
     
  3. Exhibits

 

Exhibit No.   Description
     
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 (No. 001-12928) for the quarter ended June 30, 2013)
     
3.2   Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 8-K (No. 001-12928) filed on May 9, 2013)
     
4.1   Rights Agreement, dated as of December 7, 1998, by and between Agree Realty Corporation, a Maryland corporation, and Computershare Trust Company, N.A., f/k/a EquiServe Trust Company, N.A., a national banking association, as successor rights agent to BankBoston, N.A., a national banking association (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 (No. 333-161520) filed on November 13, 2008)
     
4.2     Second Amendment to Rights Agreement, dated as of December 8, 2008, by and between Agree Realty Corporation, a Maryland corporation, and Computershare Trust Company, N.A., f/k/a EquiServe Trust Company, N.A., a national banking association, as successor rights agent to BankBoston, N.A., a national banking association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (No. 001-12928) filed on December 9, 2008)
     
4.3   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 (No. 001-12928) for the year ended December 31, 1994)
     
4.4   Form of certificate representing shares of common stock (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (No. 333-161520) filed on August 24, 2009
     
10.1   Revolving Credit Facility and Term Loan Agreement, dated July 21, 2014, among Agree Limited Partnership, PNC Bank, National Association and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 001-12928) filed on July 22, 2014)
     
10.2   First Amended and Restated Agreement of Limited Partnership of Agree Limited Partnership, dated as of April 22, 1994, as amended 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 (No. 001-12928) for the year ended December 31, 2012)
     
10.3   Second Amendment to First Amended and Restated Agreement of Limited Partnership of Agree Limited Partnership, dated as of March 20, 2013, as amended by and among the Company, the Limited Partnership and Richard Agree (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (No. 001-12928) for the quarter ended March 31, 2013)
     
10.4+   Agree Realty Corporation Profit Sharing Plan (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K (No. 001-12928) for the year ended December 31, 1996)
     
10.5+   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 (No. 001-12928) for the quarter ended September 30, 2014)
     
10.6+   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 (No. 001-12928) for the quarter ended September 30, 2014)

 

34
 

  

10.7+   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 (No. 001-12928) filed on April 6, 2010)
     
10.8+   Letter Agreement of Employment dated January 2, 2014 between Agree Limited Partnership and Brian R. Dickman (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 001-12928) filed on January 6, 2014)
     
10.9+   Summary of Director Compensation (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, 2007)
     
10.10+*   Agree Realty Corporation 2014 Omnibus Incentive Plan
     
10.11+   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 Q (No. 001-12928) for the quarter ended September 30, 2014)
     
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
     
23.2*   Consent of Baker Tilly Virchow Krause, LLP
     
24   Power of Attorney (included on the signature page of this Annual Report on Form 10-K)
     
31.1*   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, Brian R. Dickman, 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, Brian R. Dickman, Chief Financial Officer
     
101*   The following materials from Agree Realty Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013 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 Stockholders’ 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) 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, 2014. 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.

 

35
 

 

 SIGNATURES

 

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.

 

AGREE REALTY CORPORATION      
         
By: /s/ Joel N. Agree   Date:  March 6, 2015  
  Joel N. Agree      
  President and Chief Executive Officer      

 

KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Agree Realty Corporation, hereby severally constitute Richard Agree, Joel N. Agree and Brian R. Dickman, 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 6th day of March 2015.

 

By: /s/ Richard Agree   Date:  March 6, 2015  
  Richard Agree      
  Executive Chairman of the Board of Directors      
         
By: /s/ Joel N. Agree   Date:  March 6, 2015  
  Joel N. Agree      
  President, Chief Executive Officer and Director      
  (Principal Executive Officer)      
         
By: /s/ Brian R. Dickman   Date:  March 6, 2015  
  Brian R. Dickman      
  Chief Financial Officer and Secretary      
  (Principal Financial and Accounting Officer)      
         
By: /s/ Farris G. Kalil   Date:  March 6, 2015  
  Farris G. Kalil      
  Director      
         
By: /s/ John Rakolta   Date:  March 6, 2015  
  John Rakolta Jr.      
  Director      
         
By: /s/ Jerome Rossi   Date:  March 6, 2015  
  Jerome Rossi      
  Director      
         
By: /s/ William S. Rubenfaer   Date:  March 6, 2015  
  William S. Rubenfaer      
  Director      
         
By: /s/ Leon M. Schurgin   Date:  March 6, 2015  
  Leon M. Schurgin      
  Director      
         
By: /s/ Gene Silverman   Date:  March 6, 2015  
  Gene Silverman      
  Director      

 

36
 

 

  Page
   
Reports of Independent Registered Public Accounting Firms F-2
   
Financial Statements  
   
Consolidated Balance Sheets F-5
Consolidated Statements of Operations and Comprehensive Income F-7
Consolidated Statements of Stockholders’ Equity F-8
Consolidated Statements of Cash Flows F-9
   
Notes to Consolidated Financial Statements F-10
   
Schedule III - Real Estate and Accumulated Depreciation F-26

 

F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Agree Realty Corporation

 

We have audited the internal control over financial reporting of Agree Realty Corporation (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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.

 

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 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.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2014, and our report dated March 6, 2015 expressed an unqualified opinion on those financial statements.

 

/s/ GRANT THORNTON LLP

Southfield, Michigan

March 6, 2015

 

F-2
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Agree Realty Corporation

 

We have audited the accompanying consolidated balance sheets of Agree Realty Corporation (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2014. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Agree Realty Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, 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 March 6, 2015 expressed an unqualified opinion.

 

/s/ GRANT THORNTON LLP

Southfield, Michigan

March 6, 2015

 

F-3
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders, Audit Committee and Board of Directors

Agree Realty Corporation

Bloomfield Hills, MI

 

We have audited the accompanying consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows of Agree Realty Corporation for the year ended December 31, 2012. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, Agree Realty Corporation’s results of operations and cash flows for the year ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Baker Tilly Virchow Krause, LLP

Chicago, Illinois

March 8, 2013 (March 6, 2015, as to the effects of discontinued operations discussed in Note 9)

 

F-4
 

 

AGREE REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

As of December 31,

 

   2014   2013 
ASSETS          
Real Estate Investments          
Land  $195,091,303   $162,096,646 
Buildings   393,826,467    297,464,585 
Less accumulated depreciation   (59,089,851)   (60,633,824)
    529,827,919    398,927,407 
Property under development   229,242    6,959,174 
Property held for sale   -    4,845,504 
Net Real Estate Investments   530,057,161    410,732,085 
           
Cash and Cash Equivalents   5,399,458    14,536,881 
           
Accounts Receivable - Tenants, net of allowance of $35,000 for possible losses at December 31, 2014 and 2013   4,507,735    3,262,768 
           
Unamortized Deferred Expenses          
Financing costs, net of accumulated amortization of $2,690,005 and $7,009,538 at December 31, 2014 and 2013, respectively   3,008,280    2,526,768 
           
Leasing costs, net of accumulated amortization of $543,957 and $1,425,186 at December 31, 2014 and 2013, respectively   783,335    758,037 
           
Lease intangibles, net of accumulated amortization of $5,719,085 and $3,228,506 at December 31, 2014 and 2013, respectively   47,479,602    27,705,499 
           
Other Assets   2,345,290    3,219,505 
           
Total Assets  $593,580,861   $462,741,543 

 

See accompanying notes to consolidated financial statements.

 

F-5
 

 

AGREE REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

As of December 31,

 

   2014   2013 
LIABILITIES          
Mortgages Notes Payable  $106,762,238   $113,897,759 
           
Unsecured Term Loans   100,000,000    35,000,000 
           
Unsecured Revolving Credit Facility   15,000,000    9,500,000 
           
Dividends and Distributions Payable   8,048,404    6,243,933 
           
Deferred Revenue   1,004,023    1,467,403 
           
Accrued Interest Payable   721,459    470,862 
           
Accounts Payable and Accrued Expense          
Capital expenditures   200,300    144,074 
Operating   2,684,599    2,851,612 
           
Interest Rate Swap   2,383,308    204,696 
           
Deferred Income Taxes   705,000    705,000 
           
Tenant Deposits   36,156    40,647 
           
Total Liabilities   237,545,487    170,525,986 
           
STOCKHOLDERS' EQUITY          
Common stock, $.0001 par value, 28,000,000 shares authorized, 17,539,946 and 14,883,314 shares issued and outstanding, respectively   1,754    1,488 
Excess stock, $.0001 par value, 8,000,000 and 4,000,000 shares authorized, 0 shares issued and outstanding   -    - 
Preferred Stock, $.0001 par value per share, 4,000,000 and 150,000 shares authorized, respectively Series A junior participating preferred stock, $.0001 par value, 200,000 and 150,000 shares authorized, 0 shares issued and outstanding   -    - 
Additional paid-in-capital   388,262,847    312,974,162 
Deficit   (32,584,612)   (23,879,151)
Accumulated other comprehensive income (loss)   (2,059,998)   471,717 
           
Total Stockholders' Equity - Agree Realty Corporation   353,619,991    289,568,216 
Non-controlling interest   2,415,383    2,647,341 
Total Stockholders' Equity   356,035,374    292,215,557 
           
Total Liabilities and Stockholders' Equity  $593,580,861   $462,741,543 

 

See accompanying notes to consolidated financial statements.

 

F-6
 

 

AGREE REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Year Ended December 31,

 

   2014   2013   2012 
Revenues               
Minimum rents  $49,403,352   $40,895,131   $32,568,972 
Percentage rents   159,664    36,074    24,474 
Operating cost reimbursement   3,824,883    2,567,457    1,970,927 
Other income   170,958    19,002    59,989 
Total Revenues   53,558,857    43,517,664    34,624,362 
                
Operating Expenses               
Real estate taxes   2,765,905    2,035,937    1,785,917 
Property operating expenses   1,678,965    1,192,538    967,747 
Land lease payments   471,840    427,900    574,300 
General and administrative   6,629,033    5,952,433    5,681,828 
Depreciation and amortization   11,102,702    8,489,207    6,240,727 
Impairment charge   3,020,000    -    - 
Total Operating Expenses   25,668,445    18,098,015    15,250,519 
                
Income from Operations   27,890,412    25,419,649    19,373,843 
                
Other Income (Expense)               
Interest expense, net   (8,586,980)   (6,474,727)   (5,134,283)
Loss on sale of assets   (527,743)   -    - 
                
Income From Continuing Operations   18,775,689    18,944,922    14,239,560 
                
Discontinued Operations               
Gain on sale of assets from discontinued operations   122,747    946,347    2,097,105 
Income from discontinued operations   14,573    298,342    2,266,929 
                
Net Income   18,913,009    20,189,611    18,603,594 
                
Less Net Income Attributable to Non-Controlling Interest   425,017    515,036    554,150 
                
Net Income Attributable to Agree Realty Corporation  $18,487,992   $19,674,575   $18,049,444 
                
Basic Earnings Per Share               
Continuing operations  $1.23   $1.41   $1.25 
Discontinued operations   0.01    0.10    0.38 
   $1.24   $1.51   $1.63 
Diluted Earnings Per Share               
Continuing operations  $1.23   $1.40   $1.24 
Discontinued operations   0.01    0.10    0.38 
   $1.24   $1.50   $1.62 
                
Other Comprehensive Income               
Net income  $18,913,009   $20,189,611   $18,603,594 
Other Comprehensive Income (Loss)   (2,583,832)   1,812,535    (708,538)
Total Comprehensive Income   16,329,177    22,002,146    17,895,056 
Comprehensive Income Attributable to Non-Controlling Interest   (373,221)   (561,587)   (533,311)
                
Comprehensive Income Attributable to Agree Realty Corporation  $15,955,956   $21,440,559   $17,361,745 
                
Weighted Average Number of Common Shares Outstanding - Basic   14,882,586    13,065,907    11,071,318 
                
Weighted Average Number of Common Shares Outstanding - Diluted:   14,966,895    13,157,505    11,136,910 

 

See accompanying notes to consolidated financial statements.

 

F-7
 

 

AGREE REALTY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

                   Accumulated         
                   Other         
   Common Stock   Additional       Comprehensive   Non-Controlling   Total 
   Shares   Amount   Paid-In Capital   Deficit   Income (Loss)   Interest   Equity 
Balance, December 31, 2011   9,851,914    985    181,069,633    (20,918,494)   (606,568)   2,678,725    162,224,281 
Issuance of common stock, net of issuance costs   1,495,000    150    35,042,076                   35,042,226 
Issuance of restricted stock under the Equity Incentive Plan   94,850    9                        9 
Forfeiture of restricted stock   (5,720)                            - 
Vesting of restricted stock             1,657,209                   1,657,209 
Dividends and distributions declared for the period                  (18,297,459)        (556,188)   (18,853,647)
Other comprehensive income (loss) - change in fair value of interest rate swap                       (687,699)   (20,839)   (708,538)
Net income                  18,049,444         554,150    18,603,594 
Balance, December 31, 2012   11,436,044   $1,144   $217,768,918   $(21,166,509)  $(1,294,267)  $2,655,848   $197,965,134 
Issuance of common stock, net of issuance costs   3,375,000    337    93,392,712                   93,393,049 
Issuance of restricted stock under the Equity Incentive Plan   87,950    9                        9 
Forfeiture of restricted stock   (15,680)   (2)                       (2)
Vesting of restricted stock             1,812,532                   1,812,532 
Dividends and distributions declared for the period                  (22,387,217)        (570,094)   (22,957,311)
Other comprehensive income (loss) - change in fair value of interest rate swap                       1,765,984    46,551    1,812,535 
Net income                  19,674,575         515,036    20,189,611 
Balance, December 31, 2013   14,883,314   $1,488   $312,974,162   $(23,879,151)  $471,717   $2,647,341   $292,215,557 
Issuance of common stock, net of issuance costs   2,587,500    259    73,301,850                   73,302,109 
Issuance of restricted stock under the Equity Incentive Plan   81,864    8                        8 
Issuance of restricted stock under the Omnibus Incentive Plan   2,128    -                        - 
Forfeiture of restricted stock   (14,860)   (1)                       (1)
Vesting of restricted stock             1,986,835                   1,986,835 
Dividends and distributions declared for the period                  (27,193,453)        (604,857)   (27,798,310)
Other comprehensive income (loss) - change in fair value of interest rate swap                       (2,531,715)   (52,118)   (2,583,833)
Net income                  18,487,992         425,017    18,913,009 
Balance, December 31, 2014   17,539,946   $1,754   $388,262,847   $(32,584,612)  $(2,059,998)  $2,415,383   $356,035,374 

 

See accompanying notes to consolidated financial statements.

 

F-8
 

 

AGREE REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

 

   2014   2013   2012 
Cash Flows from Operating Activities               
Net income  $18,913,009   $20,189,611   $18,603,594 
Adjustments to reconcile net income to net cash provided by operating activities:               
Depreciation   8,486,178    6,996,741    5,792,281 
Amortization   3,567,409    2,483,217    1,712,530 
Stock-based compensation   1,986,835    1,812,532    1,657,209 
Impairment charge   3,020,000    450,000    - 
(Gain) loss on sale of assets   404,996    (946,347)   (2,097,105)
Increase in accounts receivable   (1,244,967)   (1,102,713)   (1,358,374)
(Increase) decrease in other assets   346,131    (780,069)   (864,294)
(Decrease) increase in accounts payable   (167,263)   838,515    (1,358,147)
Decrease in deferred revenue   (463,380)   (463,380)   (463,380)
(Decrease) increase in accrued interest   250,597    135,446    (398,779)
Decrease in tenant deposits   (4,491)   (23,814)   (19,814)
Net Cash Provided by Operating Activities   35,095,054    29,589,739    21,205,721 
                
Cash Flows from Investing Activities               
Acquisition of real estate investments   (143,272,607)   (75,920,083)   (64,166,390)
Development of real estate investments and other (including capitalized interest of $263,472 in 2014, $566,793 in 2013, and $149,054 in 2012)   (16,526,566)   (14,619,386)   (20,349,688)
Payment of leasing costs   (354,336)   (183,310)   (55,960)
Net proceeds from sale of assets   12,455,673    5,462,280    15,315,728 
Net Cash Used In Investing Activities   (147,697,836)   (85,260,499)   (69,256,310)
                
Cash Flows from Financing Activities               
Proceeds from common stock offering, net   73,302,116    93,393,056    35,042,235 
Unsecured revolving credit facility borrowings   148,622,976    106,189,924    101,220,945 
Unsecured revolving credit facility repayments   (143,122,976)   (140,219,929)   (114,134,838)
Mortgage notes payable proceeds   -    -    48,640,000 
Payments of mortgage notes payable   (12,766,704)   (3,478,383)   (3,164,654)
Term loan payable proceeds   65,000,000    35,000,000    - 
Dividends paid   (25,402,637)   (20,859,476)   (17,663,808)
Limited partners' distributions paid   (590,951)   (566,619)   (556,188)
Repayments of payables for capital expenditures   (144,074)   (122,080)   (424,321)
Payments for financing costs   (1,432,391)   (398,879)   (1,641,418)
Net Cash Provided by Financing Activities   103,465,359    68,937,614    47,317,953 
                
Net Increase (Decrease) in Cash and Cash Equivalents   (9,137,423)   13,266,854    (732,636)
Cash and Cash Equivalents, beginning of period   14,536,881    1,270,027    2,002,663 
Cash and Cash Equivalents, end of period  $5,399,458   $14,536,881   $1,270,027 
                
Supplemental Disclosure of Cash Flow Information               
Cash paid for interest (net of amounts capitalized)  $7,824,594   $6,149,649   $4,722,042 
Cash paid (refunded) for income tax  $(355)  $(21,543)  $318,289 
                
Supplemental Disclosure of Non-Cash Investing and Financing Activities               
Shares issued under equity incentive plans  $2,390,245   $2,401,688   $2,175,831 
Dividends and limited partners' distributions declared and unpaid  $8,048,404   $6,243,933   $4,710,446 
Real estate acquisitions financed with debt assumption  $5,631,183   $-   $18,220,528 

 

See accompanying notes to consolidated financial statements.

 

F-9
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

Note 1 – Organization

Agree Realty Corporation, 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. We were founded in 1971 by our current Executive Chairman, Richard Agree, and 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 we are the sole general partner and in which we held a 98.06% interest as of December 31, 2014. 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

 

The terms “Agree Realty,” the "Company," "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 controlled, as the sole general partner, 98.06% and 97.72% of the Operating Partnership as of December 31, 2014 and 2013, respectively. All material intercompany accounts and transactions are eliminated.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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

The results of operations for properties that had been disposed of or classified as held for sale prior to March 31, 2014 are reported as discontinued operations. As a result of these discontinued operations, certain reclassifications of prior period amounts have been made in the financial statements in order to conform to the 2014 presentation.

 

Segment Reporting

We are in the business of acquiring, developing and managing retail real estate which we consider one reporting segment. The Company has no other reportable segments.

 

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. Properties classified as “held for sale” are recorded at the lower of their carrying value or their fair value, less anticipated selling costs.

 

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 us 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.

 

F-10
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

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 of the real estate and the Company’s estimate of current market lease rates for the property, measured over a period equal to the remaining non-cancelable term of the lease.

 

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

Our real estate portfolio is depreciated using the straight-line method over the estimated remaining useful life of the properties, which generally ranges from 30 to 40 years for buildings and 10 to 20 years for improvements. Properties classified as “held for sale” 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.

 

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.

 

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.

 

Unamortized Deferred Expenses

Deferred expenses include debt financing costs, leasing costs and lease intangibles and are amortized as follows: (i) debt financing costs on a straight-line basis to interest expense over the term of the related loan; (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.

 

F-11
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

The following schedule summarizes the Company’s amortization of deferred expenses for the years ended December 31, 2014, 2013 and 2012, respectively:

 

Year Ended December 31,  2014   2013   2012 
             
Financing Costs  $950,878   $736,425   $581,353 
Leasing Costs   125,946    113,101    106,100 
Lease Intangibles   2,490,585    1,633,691    1,025,077 
Total  $3,567,409   $2,483,217   $1,712,530 

 

The following schedule represents estimated future amortization of deferred expenses as of December 31, 2014:

 

Year Ending December 31,  2015   2016   2017   2018   2019   Thereafter 
                         
Financing Costs  $656,218   $602,994   $565,500   $387,802   $235,320   $560,446 
Leasing Costs   114,002    103,936    97,291    91,644    85,202    291,260 
Lease Intangibles   3,750,268    3,750,268    3,750,268    3,750,268    3,359,280    29,119,250 
Total  $4,520,488   $4,457,198   $4,413,059   $4,229,714   $3,679,802   $29,970,956 

 

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.

 

Earnings per Share

Earnings per share have been computed by dividing the net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potential dilutive common shares outstanding in accordance with the treasury stock method.

 

The following is a reconciliation of the denominator of the basic net earnings per common share computation to the denominator of the diluted net earnings per common share computation for each of the periods presented:

 

   Year Ended December 31, 
   2014   2013   2012 
Weighted average number of common shares outstanding   15,121,212    13,314,989    11,321,498 
Less: Unvested restricted stock   (238,626)   (249,082)   (250,180)
Weighted average number of common shares outstanding used in basic earnings per share   14,882,586    13,065,907    11,071,318 
                
Weighted average number of common shares outstanding used in basic earnings per share   14,882,586    13,065,907    11,071,318 
Effect of dilutive securities: restricted stock   84,309    91,598    65,592 
Weighted average number of common shares outstanding used in diluted earnings per share   14,966,895    13,157,505    11,136,910 

 

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, 2014, 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.

 

F-12
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

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 April 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-08 "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" which updates Accounting Standards Codification ("ASC") Topic 205 "Presentation of Financial Statements" and ASC Topic 360 "Property, Plant and Equipment.” The amendments in this update change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. For public entities, ASU 2014-08 is effective prospectively for fiscal years beginning after December 15, 2015; however, early adoption is permitted, but only for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issuance. We have elected to early adopt this updated standard effective in the first quarter of 2014. The adoption of this guidance had an effect on the presentation of our consolidated financial statements. Beginning in 2014, activities related to individual sales of properties are generally no longer classified as discontinued operations except for the property classified as held for sale as of December 31, 2013.

 

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09 “Revenue from Contracts with Customers” as a new Topic, ASC Topic 606. The objective of ASU 2014-19 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that a company 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. In applying the new standard, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC, including revenue from leases. This ASU is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 and shall be applied using either a full retrospective or modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the new guidance and has not determined the impact, if any, this standard may have on the consolidated financial statements.

 

F-13
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

Note 3 – Real Estate Investments

Real Estate Portfolio

At December 31, 2014 and 2013, the Company’s gross investment in real estate assets, including properties under development and properties held for sale, totaled $589,147,000 and $471,366,000, respectively. Real estate investments consisted of the following as of December 31, 2014 and December 31, 2013:

 

   2014   2013 
         
Number of Properties   209    130 
Gross Leasable Area   4,315,000    3,662,000 
           
Land  $195,091,303   $162,096,646 
Buildings  $393,826,467   $297,464,585 
Property under Development  $229,242   $6,959,174 
Property Held for Sale  $-   $4,845,504 
Gross Real Estate Investments  $589,147,012   $471,365,909 
Less Accumulated Depreciation  $(59,089,851)  $(60,633,824)
Net Real Estate Investments  $530,057,161   $410,732,085 

 

Lease Intangibles

The following table details lease intangibles, net of accumulated amortization, as of December 31, 2014 and December 31, 2013:

 

   December 31,   December 31, 
   2014   2013 
Intangible Lease Asset - In-Place Leases  $36,680,631   $17,597,357 
Less: Accumulated Amortization   (3,897,008)   (1,836,593)
Intangible Lease Asset - Above-Market Leases   31,642,267    22,921,813 
Less: Accumulated Amortization   (4,111,435)   (2,392,293)
Intangible Lease Liability - Below-Market Leases   (15,124,210)   (9,585,166)
Less: Accumulated Amortization   2,289,358    1,000,380 
Lease Intangible Asset, net  $47,479,602   $27,705,499 

 

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, 2014, the future minimum rental income to be received under the terms of all non-cancellable tenant leases is as follows:

 

For the Year Ending December 31,     
2015  $54,370,464 
2016   53,876,771 
2017   53,123,664 
2018   51,646,088 
2019   48,813,782 
Thereafter   414,382,007 
Total  $676,212,776 

 

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 CPI or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales. 

 

F-14
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

Of these future minimum rents, approximately 25.4% of the total is attributable to Walgreens as of December 31, 2014. The loss of this tenant or the inability of it to pay rent could have an adverse effect on the Company’s business. No other tenant contributed 5.0% or more of the Company’s total revenues as of December 31, 2014.

 

Deferred Revenue

In July 2004, the Company’s tenant in a joint venture property located in Boynton Beach, FL repaid $4,000,000 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 $4,000,000. The Company has treated the $4,000,000 as deferred revenue and accordingly, will recognize rental income over the term of the related leases.

 

The remaining deferred revenue of approximately $1,004,000 will be recognized as minimum rents over approximately 2.2 years

 

Land Lease Obligations

The Company is subject to land lease agreements for certain of its properties. Land lease expense was $471,840, $427,900, and $574,300 for the years ending December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, future annual lease commitments under these agreements are as follows:

 

For the Year Ending December 31,     
2015  $514,653 
2016   514,653 
2017   514,653 
2018   515,569 
2019   508,528 
Thereafter   8,825,546 
Total  $11,393,602 

 

The Company leased its executive offices from a limited liability company controlled by its Executive Chairman’s children. Under the terms of the lease, which expired on December 31, 2014, the Company was required to pay an annual rental of $90,000 and was responsible for the payment of real estate taxes, insurance and maintenance expenses relating to the building.

 

2014 and 2013 Acquisitions

During 2014, the Company purchased 77 retail net lease assets for approximately $148,400,000, including acquisition and closing costs. These properties are located in 23 states and 100% leased to 28 different tenants operating in 14 unique retail sectors for a weighted average lease term of approximately 14.1 years. The underwritten weighted average capitalization rate on our 2014 investments was approximately 8.2%. None of our investments during 2014 caused any new or existing tenant to comprise 10% or more of our total assets or generate 10% or more of our total annualized base rent at December 31, 2014.

 

The aggregate 2014 acquisitions were allocated $29,969,000 to land, $95,977,000 to buildings and improvements, and $22,265,000 to lease intangible costs. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions.

 

During 2013, the Company purchased 18 retail net lease assets for approximately $73,269,000, including acquisition and closing costs. These properties are located in 13 states and 100% leased to 13 different tenants operating in 10 unique retail sectors for a weighted average lease term of approximately 10.9 years. The underwritten weighted average capitalization rate on our 2013 investments was approximately 8.0%. None of our investments during 2013 caused any new or existing tenant to comprise 10% or more of our total assets or generate 10% or more of our total annualized base rent at December 31, 2013.

 

F-15
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

The aggregate 2013 acquisitions were allocated $13,535,000 to land, $53,565,000 to buildings and improvements, and $6,872,000 to lease intangible costs. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions.

 

We calculate the weighted average capitalization rate on our investments by dividing annual expected net operating income derived from the properties by the total investment in the properties. Annual expected net operating income is defined as the straight-line rent for the base term of the lease less property level expenses (if any) that are not recoverable from the tenant.

 

Unaudited Pro Forma Information

The following unaudited pro forma total revenue and income before discontinued operations, for 2014 and 2013, assumes all of our 2014 acquisitions had taken place on January 1, 2014 for the 2014 pro forma information, and on January 1, 2013 for the 2013 pro forma information:

 

Supplemental pro forma for the year ended December 31, 2014 (1)     
Total revenue  $57,840,000 
Income before discontinued operations  $19,369,000 
      
Supplemental pro forma for the year ended December 31, 2013 (1)     
Total revenue  $50,549,000 
Income before discontinued operations  $20,023,000 

 

(1)This unaudited pro forma supplemental information does not purport to be indicative of what our operating results would have been had the acquisitions occurred on January 1, 2014 or January 1, 2013 and may not be indicative of future operating results. Various acquisitions were of newly leased or constructed assets and may not have been in service for the full periods shown.

 

Impairments

As a result of our review of Real Estate Investments we recognized the following real estate impairment charges for the year ended December 31:

 

   2014   2013   2012 
             
Continuing operations  $3,020,000   $-   $- 
Discontinued operations   -    450,000    - 
                
Total  $3,020,000   $450,000   $- 

 

In 2014, we recognized impairment charges of $220,000 and $2,800,000, respectively, for Petoskey Town Center and Chippewa Commons, which were included in continuing operations. Petoskey Town Center was under contract for sale, but not classified as held for sale at September 30, 2014 due to contingencies associated with the contract, and a $220,000 impairment charge was taken to write down the carrying value of the property to an amount that reflected the sales price. The property was subsequently sold in the fourth quarter. In the second quarter, an anchor tenant at Chippewa Commons declined to exercise an extension a lease extension option which we deemed would contribute to vacancy and diminished cash flows and result in a fair value that was less than the net book value of the asset. A $2,800,000 impairment charge was taken to write down the carrying value of the property to an amount that reflected management’s best estimate of fair market value.

 

In 2013, we recognized an impairment charge of $450,000 for Ironwood Commons, which was included in continuing operations at the time of the impairment charge. Ironwood Commons was under contract for sale, but not classified as held for sale at September 30, 2013 due to contingencies associated with the contract, and a $450,000 impairment charge was taken to write down the carrying value of the property to an amount that reflected the sales price. The property was subsequently reclassified as property held for sale and the impairment charge was included in discontinued operations as of December 31, 2013.

 

F-16
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

Note 4 – Debt

As of December 31, 2014, we had total indebtedness of $221,762,200, including (i) $106,762,000 of mortgage notes payable; (ii) $100,000,000 of unsecured term loans; and (iii) $15,000,000 of borrowings under our Credit Facility.

 

Revolving Credit and Term Loan Facility

In July 2014, the Company entered into a $250,000,000 senior unsecured revolving credit and term loan agreement consisting of (i) a new $150,000,000 revolving credit facility (the “Credit Facility”); (ii) a new $65,000,000 seven-year unsecured term loan facility (the “2021 Term Loan”); and (iii) our existing $35,000,000 unsecured term loan facility due 2020 (the “2020 Term Loan”). The Credit Facility, 2021 Term Loan and 2020 Term Loan, together, are referred to as our “Revolving Credit and Term Loan Facility.”

 

The Credit Facility is due July 21, 2018, with an additional one-year extension at the Company’s option, subject to customary conditions. Borrowings under the Credit Facility are priced at LIBOR plus 135 to 200 basis points, depending on the Company’s leverage. The Credit Facility replaced the Company’s previous $85,000,000 revolving credit facility, which was extinguished concurrent with the closing of the Credit Facility, and may be increased to an aggregate of $250,000,000 at the Company’s election, subject to certain terms and conditions. As of December 31, 2014, $15,000,000 was outstanding under the Credit Facility bearing a weighted average interest rate of approximately 1.5% and $135,000,000 was available for borrowing.

 

The 2021 Term Loan matures on July 21, 2021. Borrowings under the 2021 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the Company’s leverage. The Company entered into interest rate swaps to fix LIBOR at 2.09% until maturity, implying an all-in interest rate of 3.74% at closing. Proceeds from the 2021 Term Loan were used to repay borrowings under our previous revolving credit facility, which were used primarily to fund property acquisitions. The 2021 Term Loan may be increased to an aggregate of $75,000,000 at the Company’s election, subject to certain terms and conditions. As of December 31, 2014, $65,000,000 was outstanding under the 2021 Term Loan.

 

The 2020 Term Loan matures on September 29, 2020. Borrowings under the 2020 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the Company’s leverage. The Company entered into interest rate swaps to fix LIBOR at 2.20% until maturity, implying an all-in interest rate of 3.85% at closing. Proceeds from the 2020 Term Loan were used to repay borrowings under our previous revolving credit facility, which were used primarily to fund property acquisitions. The 2020 Term Loan may be increased to an aggregate of $70,000,000 at the Company’s election, subject to certain terms and conditions. As of December 31, 2014, $35,000,000 was outstanding under the 2020 Term Loan.

 

The Revolving Credit and Term Loan Facility contains customary covenants, including, among others, financial covenants regarding debt levels, total liabilities, tangible net worth, fixed charge coverage, unencumbered borrowing base properties, and permitted investments. The Company was in compliance with the covenant terms at December 31, 2014.

 

Mortgage Notes Payable

As of December 31, 2014, we had total mortgage indebtedness of $106,762,000 with a weighted average maturity of 5.1 years. These mortgages are collateralized by related real estate with an aggregate net book value of $147,020,000.

 

Including mortgages that have been swapped to a fixed interest rate, our weighted average interest rate on mortgage debt was 4.27% as of December 31, 2014 and 4.38% as of December 31, 2013.

 

F-17
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

Mortgages payable consisted of the following:

 

   December 31,
2014		   December 31,
2013		 
         
Note payable in monthy interest-only installments of $48,467 at 6.56% annum, with a balloon payment in the amount of $8,580,000 due June 11, 2016;  collateralized by related real estate and tenants’ leases  $8,580,000   $8,580,000 
           
Note payable in monthly installments of $99,598 including interest at 6.63% per annum, with the final monthly payment due February 2017; collateralized by related real estate and tenants’ leases   2,405,976    3,405,384 
           
Note payable in monthly principal installments of $50,120 plus interest at 170 basis points over LIBOR, swapped to a fixed rate of 3.62% as of December 31, 2013.  A final balloon payment in the amount of $19,744,758 is due on May 14, 2017 unless extended for a two year period at the option of the Company, subject to certain conditions, collateralized by related real estate and tenants’ leases   21,398,078    22,017,758 
           
Note payable in monthly installments of interest only at LIBOR plus 160 basis points, swapped to a fixed rate of 2.49% with balloon payment due April 4, 2018; collateralized by related real estate and tenants' leases   25,000,000    25,000,000 
           
Note payable in monthly installments of $153,838 including interest at 6.90% per annum, with the final monthly payment due January 2020; collateralized by related real estate and tenants’ leases   7,896,078    9,149,944 
           
Note payable in monthly installments of $23,004 including interest at 6.24% per annum, with the final balloon payment of $2,766,628 due February 2020; collateralized by related real estate and tenant lease   3,204,294    3,275,170 
           
Note payable in monthly installments of interest only at 3.60% per annum, with balloon payment due January 1, 2023; collateralized by related real estate and tenants' leases   23,640,000    23,640,000 
           
Note payable in monthly installments of $35,673 including interest at 5.01% per annum, with the final balloon payment of $4,034,627 due September 2023; collateralized by related real estate and tenant lease   5,595,327    - 
           
Note payable in monthly installments of $91,675 including interest at 6.27% per annum, with a final monthly payment due July 2026; collateralized by related real estate and tenants’ leases   9,042,485    9,557,942 
           
Note payable in monthly installments of $60,097 including interest at 5.08% per annum, with a final balloon payment in the amount of $9,167,573 due June 2014; collateralized by related real estate and tenants’ leases   -    9,271,561 
           
Total  $106,762,238   $113,897,759 

 

F-18
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

The following table presents scheduled principal payments related to our debt as of December 31, 2014:

 

For the Year Ending December 31,     
2015  $3,839,239 
2016   12,674,337 
2017 (1)   22,652,591 
2018 (2)   42,575,206 
2019   2,750,347 
Thereafter   137,270,518 
Total  $221,762,238 

 

(1)Includes $19,744,758 which represents the ending balance of a mortgage note payable due in 2017. The note matures May 14, 2017 and may be extended, at the Company’s election, for a two-year term to May 2019, subject to certain conditions.
(2)Includes the $15,000,000 outstanding balance under the Credit Facility as of December 31, 2014. The Credit Facility matures on July 21, 2018 and may be extended for one year at the Company’s election, subject to certain conditions.

 

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 a material misrepresentation, misstatement or omission by the borrower, intentional 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, 2014, the mortgage loan of $21,398,000 is partially recourse to us and is secured by a limited guaranty of payment and performance for approximately 50% of the loan amount.

 

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, 2014.

 

Note 5 – Common Stock

In September 2012, we filed, and the SEC deemed effective, a shelf registration statement that expires in September 2015. The securities covered by this registration statement cannot exceed $250,000,000 in the aggregate and include common stock, preferred stock, depositary shares and warrants. We 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.

 

We completed a follow-on offering of 2,587,500 shares of common stock in December of 2014. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $71,511,000 after deducting the underwriting discount. The proceeds from the offering were used to pay down amounts outstanding under the Credit Facility and for general corporate purposes.

 

We completed a follow-on offering of 1,650,000 shares of common stock in November of 2013. The offering raised net proceeds of approximately $48,758,000 after deducting the underwriting discount. The proceeds from the offering were used to pay down amounts outstanding under our previous revolving credit facility and for general corporate purposes.

 

We completed a follow-on offering of 1,725,000 shares of common stock in January of 2013. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $44,954,000 after deducting the underwriting discount. The proceeds from the offering were used to pay down amounts outstanding under our previous Credit Facility and for general corporate purposes.

 

F-19
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

Note 6 – Dividends and Distribution Payable

The Company declared dividends of $1.74, $1.64 and $1.60 per share during the years ended December 31, 2014, 2013 and 2012; the dividends have been reflected for federal income tax purposes as follows:

 

For the Year Ended December 31,  2014   2013   2012 
Ordinary Income  $1.398   $1.372   $1.200 
Return of Capital   0.342    0.268    0.400 
                
Total  $1.740   $1.640   $1.600 

 

On December 2, 2014, the Company declared a dividend of $0.45 per share for the quarter ended December 31, 2014. The holders OP Units were entitled to an equal distribution per OP Unit held as of December 31, 2014. The dividends and distributions payable are recorded as liabilities in the Company's consolidated balance sheet at December 31, 2014. 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 6, 2015.

 

Note 7 – Income Taxes

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, 2010. The Company has elected to record any 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, 2014, the Company has estimated a current income tax liability of $0 and a deferred income tax liability in the amount of $705,000. As of December 31, 2013, the Company had estimated a current income tax liability of $0 and a deferred income tax liability in the amount of $705,000. This deferred income tax balance represents the federal and state tax effect of deferring income tax in 2007 on the sale of an asset under section 1031 of the Internal Revenue Code. This transaction was accrued within the TRS entities described above. During the years ended December 31, 2014, and 2013, we recognized total federal and state tax expense (benefit) of ($14,000), and $3,000, respectively.

 

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.

 

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, we entered into a forward starting interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $22,300,000 in variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 1.92%. This swap effectively converted $22,300,000 of variable-rate borrowings to fixed-rate borrowings from July 1, 2013 to May 1, 2019. As of December 31, 2014, this interest rate swap was valued as a liability of $425,000.

 

F-20
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

In December 2012, we entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $25,000,000 in variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 0.89%. This swap effectively converted $25,000,000 of variable-rate borrowings to fixed-rate borrowings from December 6, 2012 to April 4, 2018. As of December 31, 2014, this interest rate swap was valued as an asset of $274,000.

 

In September 2013, we entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35,000,000 in variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 2.20%. This swap effectively converted $35,000,000 of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of December 31, 2014, this interest rate swap was valued as a liability of $911,000.

 

In July 2014, we entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65,000,000 in variable-rate borrowings. Under the terms of the interest rate swap agreement, we receive from the counterparty interest on the notional amount based on one-month LIBOR and pay to the counterparty a fixed rate of 2.09%. This swap effectively converted $65,000,000 of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of December 31, 2014, this interest rate swap was valued as a liability of $1,047,000.

 

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, changes in the fair value of the derivative instrument are recorded as a component of other comprehensive income (loss) for the year ended December 31, 2014 to the extent of effectiveness. The ineffective portion of the change in fair value of the derivative instrument is recognized in interest expense. For the year ended December 31, 2014, the Company has determined these derivative instruments to be effective hedges.

 

The company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

 

   Number of Instruments   Notional 
   December 31,   December 31,   December 31,   December 31, 
Interest Rate Derivatives  2014   2013   2014   2013 
                     
Interest Rate Swap   4    3   $146,398,078   $82,017,758 

 

F-21
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

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.

 

   Asset Derivatives
   December 31, 2014  December 31, 2013
   Balance Sheet
Location		  Fair Value   Balance Sheet
Location		  Fair Value 
Derivatives designated as cash flow hedges:                
Interest Rate Swaps   Other Assets  $274,013    Other Assets  $679,234 

 

   Liability Derivatives
   December 31, 2014  December 31, 2013
   Balance Sheet
Location		  Fair Value   Balance Sheet
Location		  Fair Value 
Derivatives designated as cash flow hedges:                
Interest Rate Swaps   Other Liabilities  $2,383,308    Other Liabilities  $204,696 

 

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, 2014 and 2013.

 

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)		   Location of Loss
Recognized In
Income of
Derivative
(Ineffective
Portion and
Amount Excluded
from
Effectiveness
Testing)		   Amount of Loss
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing and
Missed
Forecasted
Transactions)		 
                                
   2014   2013      2014   2013       2014   2013 
                                       
Interest rate swaps  $(2,583,832)  $1,812,536   Interest Expense  $(1,875,420)  $(773,120)       $-   $- 

 

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, 2014.

 

Note 9 – Discontinued Operations

We elected to early adopt ASU 2014-08 "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" in the first quarter of 2014. The adoption of this guidance had an effect on the presentation of our consolidated financial statements. Beginning in 2014, activities related to individual asset sales are generally no longer classified as discontinued operations except for the property classified as held for sale as of December 31, 2013.

 

In January 2014, the Company sold a Kmart-anchored shopping center in Ironwood, Michigan, which was classified as held for sale on December 31, 2013, for approximately $5,000,000. The results of operations for this property are reported in discontinued operations for the twelve months ended 2014, 2013 and 2012, including revenues of approximately $42,600, $1,281,000 and $1,165,000 respectively, and expenses of approximately $28,000, $990,000 and $481,000, respectively.

 

In January 2013, the Company sold a single tenant property located in Ypsilanti, Michigan, which was classified as held for sale on December 31, 2012, for approximately $5,600,000. The results of operations for this property are reported in discontinued operations for the twelve months ended 2013 and 2012, including revenues of approximately $9,300 and $346,000, respectively, and expenses of approximately $2,300 and $75,900, respectively.

 

F-22
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

During 2012, the Company sold six non-core properties, including a Kmart-anchored shopping center in Charlevoix, Michigan, a Kmart-anchored shopping center in Plymouth, Wisconsin, a Kmart-anchored shopping center in Shawano, Wisconsin, a vacant single tenant office property and two vacant single tenant retail properties. In addition, the Company conveyed four mortgaged properties, which were previously leased to Borders, Inc., to the lender in March 2012 pursuant to a consensual deed-in-lieu-of-foreclosure process that satisfied the loans. The results of operations for these properties are reported as discontinued operations for the twelve months ended 2012 including revenues of approximately $2,421,000 and expenses of approximately $949,000.

 

Note 10 – Fair Value Measurements

The table below sets forth the Company’s fair value hierarchy for assets and liabilities measured or disclosed at fair value as of December 31, 2014.

 

Asset:  Level 1   Level 2   Level 3   Carrying Value 
Interest rate swaps  $-   $274,013   $-   $274,013 

 

Liability:  Level 1   Level 2   Level 3   Carrying Value 
Interest rate swaps  $-   $2,383,308   $-   $2,383,308 
Mortgage notes payable  $-   $-   $107,814,314   $106,762,238 
Revolving credit facility  $-   $15,000,000   $-   $15,000,000 
Unsecured term loans  $-   $-   $97,918,642   $100,000,000 

 

The table below sets forth the Company’s fair value hierarchy for liabilities measured or disclosed at fair value as of December 31, 2013.

 

Asset:  Level 1   Level 2   Level 3   Carrying Value 
Interest rate swaps  $-   $679,234   $-   $679,234 

 

Liability:  Level 1   Level 2   Level 3   Carrying Value 
Interest rate swaps  $-   $204,696   $-   $204,696 
Mortgage notes payable  $-   $-   $108,385,281   $113,897,758 
Revolving credit facility  $-   $9,500,000   $-   $9,500,000 
Unsecured term loan  $-   $-   $32,728,011   $35,000,000 

 

The carrying amounts of the Company’s short-term financial instruments, which consist of cash, cash equivalents, receivables, and accounts payable, approximate their fair values. The fair value of the interest rate swaps were derived using estimates to settle the interest rate swap agreements, which are based on the net present value of expected future cash flows on each leg of the swap utilizing market-based inputs and discount rates reflecting the risks involved. The fair value of fixed mortgages was derived using the present value of future mortgage payments based on estimated current market interest rates of 4.17% and 5.04% at December 31, 2014 and 2013, respectively. The fair value of variable rate debt is estimated to be equal to the face value of the debt because the interest rates are floating and is considered to approximate fair value.

 

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 Plan. The 2014 Plan authorizes the issuance of a maximum of 700,000 shares of common stock.

 

No options were granted during 2014, 2013 or 2012.

 

F-23
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

Restricted common stock has been granted to certain employees under both the 2005 Plan and the 2014 Plan. As of December 31, 2014, there was $4,319,000 of total unrecognized compensation costs related to the outstanding restricted stock, which is expected to be recognized over a weighted average period of 3.0 years. The Company used 0% for both the discount factor and forfeiture rate for determining the fair value of restricted stock. The Company has deemed historical forfeitures insignificant and does not consider discount rates to be material.

 

The holder of a restricted share award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The Company granted 81,082, 87,950, and 94,850 shares of restricted stock in 2014, 2013, and 2012, respectively to employees and sub-contractors under the 2005 Plan and 2,128 shares of restricted stock in 2014 under the 2014 Plan. The restricted shares vest over a five-year period based on continued service to the Company.

 

Restricted share activity is summarized as follows:

 

   Shares
Outstanding		   Weighted
Average Grant
Date
Fair Value		 
         
Unvested restricted stock at December 31, 2011   216,920   $21.74 
           
Restricted stock granted   94,850   $24.40 
Restricted stock vested   (55,870)  $21.87 
Restricted stock forfeited   (5,720)  $24.32 
           
Unvested restricted stock at December 31, 2012   250,180   $22.66 
           
Restricted stock granted   87,950   $27.70 
Restricted stock vested   (73,368)  $22.50 
Restricted stock forfeited   (15,680)  $25.01 
           
Unvested restricted stock at December 31, 2013   249,082   $24.33 
           
Restricted stock granted   83,210   $28.72 
Restricted stock vested   (79,588)  $22.64 
Restricted stock forfeited   (14,078)  $26.03 
           
Unvested restricted stock at December 31, 2014   238,626   $26.24 

 

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 2014, 2013, or 2012.

 

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, 2013 through December 31, 2014. Certain amounts have been reclassified to conform to the current presentation of discontinued operations:

 

F-24
 

 

Agree Realty Corporation Notes to Consolidated Financial Statements

 

   2014 
   Three Months Ended 
   March 31   June 30   September
30		   December 31 
                 
Revenue  $12,575   $12,904   $13,757   $14,323 
                     
Net Income  $5,509   $2,716   $4,966   $5,723 
                     
Earnings per Share - diluted  $0.37   $0.18   $0.33   $0.36 

 

   2013 
   Three Months Ended 
   March 31   June 30   September
30		   December 31 
                 
Revenue  $9,928   $10,601   $11,272   $11,716 
                     
Net Income  $5,392   $4,530   $4,646   $5,622 
                     
Earnings per Share - diluted  $0.41   $0.34   $0.35   $0.40 

 

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 January 2015, the Company repaid a mortgage loan with a balance of $2,406,000 as of December 31, 2014. This loan had an effective interest rate of 6.63% and was fully amortizing with a final monthly payment due February 2017.

 

In January 2015, the Company granted a total of 77,801 shares of restricted stock to employees and associates under the 2014 Plan. The fair value of these grants approximate $2,609,000 and the restricted shares vest over a five year period based on continued service to the Company.

  

On March 5, 2015, the Company declared a dividend of $0.45 per share for the quarter ending March 31, 2015 for holders of record on March 31, 2015. The holders of OP Units are also entitled to an equal distribution per OP Unit held as of March 31, 2015. The amounts are to be paid on April 14, 2015.

 

There were no other reportable subsequent events or transactions.

 

F-25
 

 

Agree Realty Corporation  
Schedule III – Real Estate and Accumulated Depreciation December 31, 2014

   

COLUMN  A  COLUMN  B   COLUMN  C   COLUMN  D   COLUMN  E   COLUMN  F   COLUMN  G  COLUMN  H
               Costs                      Life on Which
Depreciation in
       Initial Cost   Capitalized   Gross Amount at Which Carried at Close of Period          Latest Income
           Building and   Subsequent to       Building and       Accumulated   Date of  Statement is
Description  Encumbrance   Land   Improvements   Acquisition   Land   Improvements   Total   Depreciation   Acquisition  Computed
Real Estate Held for Investment                                              
Borman Center, MI  $-   $550,000   $562,404   $1,087,596   $550,000   $1,650,000   $2,200,000   $1,618,022   1977  40 Years
Capital Plaza, KY   -    7,379    2,240,607    3,510,133    7,379    5,750,740    5,758,119    2,887,183   1978  40 Years
Grayling Plaza, MI   -    200,000    1,778,657    -    200,000    1,778,657    1,978,657    1,363,755   1984  40 Years
Marshall Plaza Two, MI   -    -    4,662,230    159,688    -    4,821,918    4,821,918    2,822,969   1990  40 Years
North Lakeland Plaza, FL   -    1,641,879    6,364,379    2,052,496    1,641,879    8,416,875    10,058,754    5,126,106   1987  40 Years
Oscoda Plaza, MI   -    183,295    1,872,854    -    183,295    1,872,854    2,056,149    1,433,536   1984  40 Years
Rapids Associates, MI   -    705,000    6,854,790    2,157,041    705,000    9,011,831    9,716,831    4,600,697   1990  40 Years
West Frankfort Plaza, IL   -    8,002    784,077    202,463    8,002    986,540    994,542    700,383   1982  40 Years
Omaha Store, NE   -    150,000    -    -    150,000    -    150,000    -   1995  40 Years
Wichita Store, KS   1,669,449    1,039,195    1,690,644    (48,910)   1,139,677    1,541,252    2,680,929    775,757   1995  40 Years
Monroeville, PA   -    6,332,158    2,249,724    (2,586,265)   3,153,890    2,841,727    5,995,617    968,975   1996  40 Years
Boynton Beach, FL   -    1,534,942    2,043,122    3,754,994    1,534,942    5,798,116    7,333,058    1,343,608   1996  40 Years
Lawrence, KS   -    981,331    3,000,000    (1,510,873)   419,791    2,050,667    2,470,458    1,221,625   1997  40 Years
Waterford, MI   579,356    971,009    1,562,869    135,390    971,009    1,698,259    2,669,268    720,723   1997  40 Years
Chesterfield Township, MI   636,140    1,350,590    1,757,830    (46,164)   1,350,590    1,711,666    3,062,256    706,644   1998  40 Years
Grand Blanc, MI   607,750    1,104,285    1,998,919    43,929    1,104,285    2,042,848    3,147,133    812,241   1998  40 Years
Pontiac, MI   582,728    1,144,190    1,808,955    (113,506)   1,144,190    1,695,449    2,839,639    690,483   1998  40 Years
Mt Pleasant Shopping Ctr, MI   -    907,600    8,081,968    1,024,052    907,600    9,106,020    10,013,620    4,808,049   1973  40 Years
Rochester, MI   1,582,374    2,438,740    2,188,050    1,949    2,438,740    2,189,999    4,628,739    848,601   1999  40 Years
Ypsilanti, MI   1,429,190    2,050,000    2,222,097    32,641    2,050,000    2,254,738    4,304,738    844,665   1999  40 Years
Petoskey, MI   994,116    -    2,332,473    1,179    -    2,333,652    2,333,652    855,585   2000  40 Years
Flint, MI   1,499,465    2,026,625    1,879,700    (1,201)   2,026,625    1,878,499    3,905,124    657,481   2000  40 Years
Flint, MI   1,290,219    1,477,680    2,241,293    -    1,477,680    2,241,293    3,718,973    777,445   2001  40 Years
New Baltimore, MI   1,100,713    1,250,000    2,285,781    (16,502)   1,250,000    2,269,279    3,519,279    758,965   2001  40 Years
Flint, MI   2,969,578    1,729,851    1,798,091    660    1,729,851    1,798,751    3,528,602    571,441   2002  40 Years
Indianapolis, IN   -    180,000    1,117,617    -    180,000    1,117,617    1,297,617    362,158   2002  40 Years
Big Rapids, MI   -    1,201,675    2,014,107    (2,000)   1,201,675    2,012,107    3,213,782    591,097   2003  40 Years
Flint, MI   -    -    471,272    (201,810)   -    269,462    269,462    125,748   2003  20 Years
Canton Twp, MI   -    1,550,000    2,132,096    23,020    1,550,000    2,155,116    3,705,116    597,098   2003  40 Years
Flint, MI   3,441,685    1,537,400    1,961,674    -    1,537,400    1,961,674    3,499,074    531,371   2004  40 Years
Webster, NY   -    1,600,000    2,438,781    -    1,600,000    2,438,781    4,038,781    657,967   2004  40 Years
Albion, NY   -    1,900,000    3,037,864    -    1,900,000    3,037,864    4,937,864    768,962   2004  40 Years
Flint, MI   2,631,221    1,029,000    2,165,463    (6,666)   1,029,000    2,158,797    3,187,797    546,405   2004  40 Years
Lansing, MI   -    785,000    348,501    3,045    785,000    351,546    1,136,546    92,245   2004  40 Years
Boynton Beach, FL   -    1,569,000    2,363,524    -    1,569,000    2,363,524    3,932,524    633,826   2004  40 Years
Midland, MI   -    2,350,000    2,313,413    (79,235)   2,268,695    2,315,483    4,584,178    547,439   2005  40 Years
Grand Rapids, MI   2,959,784    1,450,000    2,646,591    -    1,450,000    2,646,591    4,096,591    617,539   2005  40 Years

 

F-26
 

 

Agree Realty Corporation  
Schedule III – Real Estate and Accumulated Depreciation December 31, 2014

 

COLUMN  A  COLUMN  B   COLUMN  C   COLUMN  D   COLUMN  E   COLUMN  F   COLUMN  G  COLUMN  H
               Costs                      Life on Which
Depreciation in
       Initial Cost   Capitalized   Gross Amount at Which Carried at Close of Period          Latest Income
           Building and   Subsequent to       Building and       Accumulated   Date of  Statement is
Description  Encumbrance   Land   Improvements   Acquisition   Land   Improvements   Total   Depreciation   Acquisition  Computed
                                               
Delta Township, MI   3,090,351    2,075,000    2,535,971    7,004    2,075,000    2,542,975    4,617,975    582,824   2005  40 Years
Roseville, MI   2,336,328    1,771,000    2,327,052    -    1,771,000    2,327,052    4,098,052    530,857   2005  40 Years
Mt Pleasant, MI   1,252,087    1,075,000    1,432,390    4,787    1,075,000    1,437,177    2,512,177    326,346   2005  40 Years
N Cape May, NJ   -    1,075,000    1,430,092    495    1,075,000    1,430,587    2,505,587    324,859   2005  40 Years
Summit Twp, MI   1,431,882    998,460    1,336,357    12,686    998,460    1,349,043    2,347,503    277,204   2006  40 Years
Livonia, MI   4,240,564    1,200,000    3,441,694    817,589    1,200,000    4,259,283    5,459,283    778,062   2007  40 Years
Barnesville, GA   -    932,500    2,091,514    5,490    932,500    2,097,004    3,029,504    377,868   2007  40 Years
East Lansing, MI   -    240,000    54,531    -    240,000    54,531    294,531    9,519   2007  40 Years
Plainfield, IN   -    4,549,758    -    114,383    4,664,141    -    4,664,141    -   2007  40 Years
Macomb Township, MI   3,955,574    2,621,500    3,484,212    (83,479)   2,537,222    3,485,011    6,022,233    595,339   2008  40 Years
Shelby Township, MI   3,383,595    2,055,174    2,533,876    47,775    2,058,474    2,578,351    4,636,825    412,803   2008  40 Years
Silver Springs Shores, FL   3,637,014    1,975,000    2,504,112    (5,400)   1,975,000    2,498,712    4,473,712    374,942   2009  40 Years
Brighton, MI   -    1,365,000    2,802,036    5,615    1,365,000    2,807,651    4,172,651    409,370   2009  40 Years
Port St John, FL   -    2,320,860    2,402,641    880    2,320,860    2,403,521    4,724,381    340,484   2009  40 Years
Lowell, MI   -    890,000    1,930,182    10,190    890,000    1,940,372    2,830,372    254,610   2009  40 Years
Southfield, MI   -    1,200,000    125,616    2,064    1,200,000    127,690    1,327,690    16,617   2009  40 Years
Atchison, KS   -    943,750    3,021,672    -    823,170    3,142,252    3,965,422    351,996   2010  40 Years
Johnstown, OH   2,384,927    485,000    2,799,502    -    485,000    2,799,502    3,284,502    314,945   2010  40 Years
Lake in the Hills, IL   -    2,135,000    3,328,560    -    1,690,000    3,773,560    5,463,560    418,963   2010  40 Years
Concord, NC   -    7,676,305    -    -    7,676,305    -    7,676,305    -   2010  40 Years
Antioch, IL   1,669,449    1,087,884    -    -    1,087,884    -    1,087,884    -   2010  40 Years
St Augustine Shores, FL   -    1,700,000    1,973,929    (4,754)   1,700,000    1,969,175    3,669,175    202,933   2010  40 Years
Atlantic Beach, FL   3,452,182    1,650,000    1,904,357    1,262    1,650,000    1,905,619    3,555,619    198,398   2010  40 Years
Mansfield, CT   2,170,284    700,000    1,902,191    508    700,000    1,902,699    2,602,699    196,213   2010  40 Years
Spring Grove, IL   2,313,000    1,191,199    -    968    1,192,167    -    1,192,167    -   2010  40 Years
Ann Arbor, MI   -    -    3,061,507    2,634,651    2,660,582    3,035,576    5,696,158    321,871   2010  40 Years
Tallahassee, FL   1,628,000    -    1,482,462    -    -    1,482,462    1,482,462    149,791   2010  40 Years
Wilmington, NC   2,186,000    1,500,000    1,348,591    -    1,500,000    1,348,591    2,848,591    129,240   2011  40 Years
Marietta, GA   900,000    575,000    696,297    6,359    575,000    702,656    1,277,656    61,402   2011  40 Years
Baltimore, MD   2,534,000    2,610,430    -    (3,447)   2,606,983    -    2,606,983    -   2011  40 Years
Dallas, TX   1,844,000    701,320    778,905    1,042,730    701,320    1,821,635    2,522,955    144,737   2011  40 Years
Chandler, AZ   1,550,203    332,868    793,898    360    332,868    794,258    1,127,126    64,571   2011  40 Years
New Lenox, IL   1,192,464    1,422,488    -    -    1,422,488    -    1,422,488    -   2011  40 Years
Roseville, CA   4,752,000    2,800,000    3,695,455    (96,364)   2,695,636    3,703,455    6,399,091    308,554   2011  40 Years
Fort Walton Beach, FL   1,768,000    542,200    1,958,790    303    542,200    1,959,093    2,501,293    151,009   2011  40 Years
Leawood, KS   3,204,294    989,622    3,003,541    16,198    989,622    3,019,739    4,009,361    226,480   2011  40 Years
Salt Lake City, UT   4,948,724    -    6,810,104    (44,417)   -    6,765,687    6,765,687    542,896   2011  40 Years

 

F-27
 

 

Agree Realty Corporation  
Schedule III – Real Estate and Accumulated Depreciation December 31, 2014

 

COLUMN  A  COLUMN  B   COLUMN  C   COLUMN  D   COLUMN  E   COLUMN  F   COLUMN  G  COLUMN  H
               Costs                      Life on Which
Depreciation in
       Initial Cost   Capitalized   Gross Amount at Which Carried at Close of Period          Latest Income
           Building and   Subsequent to       Building and       Accumulated   Date of  Statement is
Description  Encumbrance   Land   Improvements   Acquisition   Land   Improvements   Total   Depreciation   Acquisition  Computed
                                       
Burton, MI   -    80,000    -    -    80,000    -    80,000    -   2011   
Macomb Township, MI   1,793,000    1,605,134    -    -    1,605,134    -    1,605,134    -   2012  40 Years
Madison, AL   1,552,000    675,000    1,317,927    -    675,000    1,317,927    1,992,927    98,844   2012  40 Years
Walker, MI   887,000    219,200    1,024,738    -    219,200    1,024,738    1,243,938    70,448   2012  40 Years
Portland, OR   -    7,969,403    -    161    7,969,564    -    7,969,564    -   2012  40 Years
Cochran, GA   -    365,714    2,053,726    -    365,714    2,053,726    2,419,440    128,358   2012  40 Years
Baton Rouge, LA   1,073,217    -    1,188,322    -    -    1,188,322    1,188,322    76,746   2012  40 Years
Southfield, MI   1,483,000    1,178,215    -    -    1,178,215    -    1,178,215    -   2012  40 Years
Clifton Heights, PA   3,898,994    2,543,941    3,038,561    -    2,543,941    3,038,561    5,582,502    186,554   2012  40 Years
Newark, DE   2,492,444    2,117,547    4,777,516    -    2,117,547    4,777,516    6,895,063    293,318   2012  40 Years
Vineland, NJ   2,188,562    4,102,710    1,501,854    -    4,102,710    1,501,854    5,604,564    92,792   2012  40 Years
Fort Mill, SC   -    750,000    1,187,380    -    750,000    1,187,380    1,937,380    71,738   2012  40 Years
Spartanburg, SC   -    250,000    765,714    -    250,000    765,714    1,015,714    45,464   2012  40 Years
Springfield, IL   -    302,520    653,654    -    302,520    653,654    956,174    38,130   2012  40 Years
Jacksonville, NC   -    676,930    1,482,748    -    676,930    1,482,748    2,159,678    86,494   2012  40 Years
Morrow, GA   -    525,000    1,383,489    (99,850)   525,000    1,283,639    1,808,639    72,829   2012  40 Years
Charlotte, NC   -    1,822,900    3,531,275    (572,344)   1,822,900    2,958,931    4,781,831    162,660   2012  40 Years
Lyons, GA   -    121,627    2,155,635    (126,199)   121,627    2,029,436    2,151,063    105,963   2012  40 Years
Fuquay-Varina, NC   -    2,042,225    1,763,768    (255,778)   2,042,225    1,507,990    3,550,215    79,074   2012  40 Years
Minneapolis, MN   -    1,088,015    345,958    (54,430)   826,635    552,908    1,379,543    28,366   2012  40 Years
Lake Zurich, IL   -    780,974    7,909,277    28,174    780,974    7,937,451    8,718,425    405,111   2012  40 Years
Lebanon, VA   -    300,000    612,582    16,363    300,000    628,945    928,945    31,447   2012  40 Years
Harlingen, TX   -    430,000    1,614,378    12,854    430,000    1,627,232    2,057,232    81,362   2012  40 Years
Wichita, TX   -    340,000    1,530,971    12,854    340,000    1,543,825    1,883,825    77,191   2012  40 Years
Pensacola, FL   -    650,000    1,165,415    12,854    650,000    1,178,269    1,828,269    58,913   2012  40 Years
Pensacola, FL   -    400,000    1,507,583    12,854    400,000    1,520,437    1,920,437    76,022   2012  40 Years
Venice, FL   -    1,300,196    -    4,891    1,305,087    -    1,305,087    -   2012  40 Years
St. Joseph, MO   -    377,620    7,639,521    -    377,620    7,639,521    8,017,141    366,060   2013  40 Years
Statham, GA   -    191,919    3,851,073    -    191,919    3,851,073    4,042,992    184,531   2013  40 Years
North Las Vegas, NV   -    214,552    717,435    -    214,552    717,435    931,987    33,630   2013  40 Years
Memphis, TN   -    322,520    748,890    -    322,520    748,890    1,071,410    34,324   2013  40 Years
Rancho Cordova, CA   -    3,889,612    3,232,662    282,130    3,889,612    3,514,792    7,404,404    148,482   2013  40 Years
Kissimmee, FL   -    1,453,500    971,683    -    1,453,500    971,683    2,425,183    42,511   2013  40 Years
Pinellas Park, FL   -    2,625,000    874,542    3,965    2,625,000    878,507    3,503,507    34,716   2013  40 Years
Manchester, CT   -    397,800    325,705    -    397,800    325,705    723,505    13,571   2013  40 Years
Rapid City, SD   -    1,017,800    2,348,032    -    1,017,800    2,348,032    3,365,832    95,389   2013  40 Years
Chicago, IL   -    272,222    649,063    -    272,222    649,063    921,285    25,692   2013  40 Years

 

F-28
 

 

Agree Realty Corporation  
Schedule III – Real Estate and Accumulated Depreciation December 31, 2014

 

COLUMN  A  COLUMN  B   COLUMN  C   COLUMN  D   COLUMN  E   COLUMN  F   COLUMN  G  COLUMN  H
               Costs                      Life on Which
Depreciation in
       Initial Cost   Capitalized   Gross Amount at Which Carried at Close of Period          Latest Income
           Building and   Subsequent to       Building and       Accumulated   Date of  Statement is
Description  Encumbrance   Land   Improvements   Acquisition   Land   Improvements   Total   Depreciation   Acquisition  Computed
                                               
Brooklyn, OH   -    3,643,700    15,079,714    -    3,643,700    15,079,714    18,723,414    565,489   2013  40 Years
Madisonville, TX   -    96,680    1,087,642    -    96,680    1,087,642    1,184,322    40,787   2013  40 Years
Baton Rouge, LA   -    271,400    1,086,434    -    271,400    1,086,434    1,357,834    38,478   2013  40 Years
Forest, MS   -    -    1,298,176    -    -    1,298,176    1,298,176    45,977   2013  40 Years
Sun Valley, NV   -    308,495    1,373,336    2,819    308,495    1,376,155    1,684,650    45,848   2013  40 Years
Rochester, NY   -    2,500,000    7,398,639    -    2,500,000    7,398,639    9,898,639    238,914   2013  40 Years
Allentown, PA   -    2,525,051    7,896,613    -    2,525,051    7,896,613    10,421,664    254,995   2013  40 Years
Casselberry, FL   -    1,804,000    793,101    -    1,804,000    793,101    2,597,101    28,089   2013  40 Years
Berwyn, IL   -    186,791    933,959    5,400    186,791    939,359    1,126,150    25,430   2013  40 Years
Grand Forks, ND   -    1,502,609    2,301,337    1,801,028    1,502,609    4,102,365    5,604,974    112,148   2013  40 Years
Ann Arbor, MI   -    3,000,000    4,595,757    276,163    3,000,000    4,871,920    7,871,920    131,372   2013  40 Years
Joplin, MO   -    1,208,225    1,160,843    -    1,208,225    1,160,843    2,369,068    33,858   2013  40 Years
Red Bay, AL   -    38,981    2,528,437    -    38,981    2,528,437    2,567,418    10,535   2014  40 Years
Birmingham, AL   -    230,106    231,313    -    230,106    231,313    461,419    482   2014  40 Years
Birmingham, AL   -    245,234    251,339    -    245,234    251,339    496,573    524   2014  40 Years
Birmingham, AL   -    98,271    179,824    -    98,271    179,824    278,095    375   2014  40 Years
Birmingham, AL   -    235,641    127,477    -    235,641    127,477    363,118    266   2014  40 Years
Montgomery, AL   -    325,389    217,850    -    325,389    217,850    543,239    454   2014  40 Years
Littleton, CO   5,595,327-    819,000    8,756,266    -    819,000    8,756,266    9,575,266    54,727   2014  40 Years
St Petersburg, FL   -    1,225,000    1,025,247    -    1,225,000    1,025,247    2,250,247    19,223   2014  40 Years
St Augustine, FL   -    200,000    1,523,230    -    200,000    1,523,230    1,723,230    9,520   2014  40 Years
East Palatka, FL   -    730,000    575,236    -    730,000    575,236    1,305,236    3,595   2014  40 Years
Pensacola, FL   -    136,365    398,773    -    136,365    398,773    535,138    831   2014  40 Years
Jacksonville, FL   -    297,066    312,818    -    297,066    312,818    609,884    -   2014  40 Years
Jacksonville, FL   -    299,312    348,862    -    299,312    348,862    648,174    -   2014  40 Years
Fort Oglethorpe, GA   -    1,842,240    2,844,126    -    1,842,240    2,844,126    4,686,366    65,178   2014  40 Years
New Lenox, IL   -    2,010,000    6,206,252    -    2,010,000    6,206,252    8,216,252    34,234   2014  40 Years
Rockford, IL   -    303,395    2,436,873    -    303,395    2,436,873    2,740,268    15,230   2014  40 Years
Indianapolis, IN   -    575,000    1,871,110    -    575,000    1,871,110    2,446,110    35,083   2014  40 Years
Terre Haute, IN   -    103,147    2,477,263    -    103,147    2,477,263    2,580,410    -   2014  40 Years
Junction City, KS   -    78,271    2,504,294    -    78,271    2,504,294    2,582,565    -   2014  40 Years
Baton Rouge, LA   -    226,919    347,691    -    226,919    347,691    574,610    724   2014  40 Years
Lincoln Park, MI   -    543,303    1,408,544    -    543,303    1,408,544    1,951,847    26,410   2014  40 Years
Novi, MI   -    1,803,857    1,488,505    -    1,803,857    1,488,505    3,292,362    -   2014  40 Years
Bloomfield Hills, MI   -    1,340,000    2,003,406    -    1,340,000    2,003,406    3,343,406    6,966   2014  40 Years
Moreahead, MN   -    511,645    870,732    -    511,645    870,732    1,382,377    3,628   2014  40 Years
Fergus Falls, MN   -    405,617    561,332    -    405,617    561,332    966,949    2,339   2014  40 Years

 

F-29
 

 

Agree Realty Corporation  
Schedule III – Real Estate and Accumulated Depreciation December 31, 2014

 

COLUMN  A  COLUMN  B   COLUMN  C   COLUMN  D   COLUMN  E   COLUMN  F   COLUMN  G  COLUMN  H
               Costs                      Life on Which
Depreciation in
       Initial Cost   Capitalized   Gross Amount at Which Carried at Close of Period          Latest Income
           Building and   Subsequent to       Building and       Accumulated   Date of  Statement is
Description  Encumbrance   Land   Improvements   Acquisition   Land   Improvements   Total   Depreciation   Acquisition  Computed
                                               
Fergus Falls, MN   -    327,247    655,973    -    327,247    655,973    983,220    2,733   2014  40 Years
Park Rapids, MN   -    413,151    706,884    -    413,151    706,884    1,120,035    2,945   2014  40 Years
Jackson, MS   -    256,789    172,184    -    256,789    172,184    428,973    359   2014  40 Years
Belton, MO   -    714,775    7,173,999    -    714,775    7,173,999    7,888,774    -   2014  40 Years
Great Falls, MT   -    945,765    753,222    -    945,765    753,222    1,698,987    -   2014  40 Years
Irvington, NJ   -    315,000    1,313,025    -    315,000    1,313,025    1,628,025    24,619   2014  40 Years
East Grand Forks, ND   -    313,454    914,676    -    313,454    914,676    1,228,130    3,811   2014  40 Years
Fargo, ND   -    513,505    1,201,532    -    513,505    1,201,532    1,715,037    5,006   2014  40 Years
Fargo, ND   -    629,484    707,799    -    629,484    707,799    1,337,283    2,949   2014  40 Years
Jamestown, ND   -    234,545    1,158,486    -    234,545    1,158,486    1,393,031    4,827   2014  40 Years
Grand Forks, ND   -    540,658    813,776    -    540,658    813,776    1,354,434    3,391   2014  40 Years
Grand Forks, ND   -    762,471    554,595    -    762,471    554,595    1,317,066    2,311   2014  40 Years
Grand Forks, ND   -    529,087    676,026    -    529,087    676,026    1,205,113    2,817   2014  40 Years
Toledo, OH   -    500,000    1,372,363    -    500,000    1,372,363    1,872,363    25,732   2014  40 Years
Toledo, OH   -    155,250    762,500    -    155,250    762,500    917,750    7,943   2014  40 Years
Toledo, OH   -    213,750    754,675    -    213,750    754,675    968,425    7,861   2014  40 Years
Toledo, OH   -    168,750    785,000    -    168,750    785,000    953,750    8,177   2014  40 Years
Port Clinton, OH   -    75,000    721,100    -    75,000    721,100    796,100    7,511   2014  40 Years
Mansfield, OH   -    306,000    725,600    -    306,000    725,600    1,031,600    7,558   2014  40 Years
Orville, OH   -    344,250    716,600    -    344,250    716,600    1,060,850    7,465   2014  40 Years
Akron, OH   -    427,750    715,700    -    427,750    715,700    1,143,450    7,455   2014  40 Years
Akron, OH   -    696,000    845,000    -    696,000    845,000    1,541,000    8,802   2014  40 Years
Hubbard, OH   -    204,000    726,500    -    204,000    726,500    930,500    7,568   2014  40 Years
Youngstown, OH   -    285,000    745,700    -    285,000    745,700    1,030,700    7,768   2014  40 Years
Calcutta, OH   -    208,050    758,750    -    208,050    758,750    966,800    7,904   2014  40 Years
Columbus, OH   -    -    1,136,250    -    -    1,136,250    1,136,250    9,469   2014  40 Years
Tulsa, OK   -    459,148    640,550    -    459,148    640,550    1,099,698    13,345   2014  40 Years
Ligonier, PA   -    330,000    5,021,849    -    330,000    5,021,849    5,351,849    52,311   2014  40 Years
Clarion, PA   -    121,200    771,500    -    121,200    771,500    892,700    8,036   2014  40 Years
Mercer, PA   -    121,200    770,000    -    121,200    770,000    891,200    8,021   2014  40 Years
Limerick, PA   -    369,000    -    -    369,000    -    369,000    -   2014  40 Years
Harrisbuarg, PA   -    124,757    1,446,773    -    124,757    1,446,773    1,571,530    -   2014  40 Years
Andreson, SC   -    781,200    4,441,535    -    781,200    4,441,535    5,222,735    101,785   2014  40 Years
Easley, SC   -    332,275    268,612    -    332,275    268,612    600,887    560   2014  40 Years
Spartanburg, SC   -    141,307    446,706    -    141,307    446,706    588,013    931   2014  40 Years
Spartanburg, SC   -    94,770    261,640    -    94,770    261,640    356,410    545   2014  40 Years
Columbia, SC   -    303,932    1,221,964    -    303,932    1,221,964    1,525,896    2,546   2014  40 Years

 

F-30
 

 

Agree Realty Corporation  
Schedule III – Real Estate and Accumulated Depreciation December 31, 2014

 

COLUMN  A  COLUMN  B   COLUMN  C   COLUMN  D   COLUMN  E   COLUMN  F   COLUMN  G  COLUMN  H
               Costs                      Life on Which
Depreciation in
       Initial Cost   Capitalized   Gross Amount at Which Carried at Close of Period          Latest Income
           Building and   Subsequent to       Building and       Accumulated   Date of  Statement is
Description  Encumbrance   Land   Improvements   Acquisition   Land   Improvements   Total   Depreciation   Acquisition  Computed
                                               
Alcoa, TN   -    329,074    270,719    -    329,074    270,719    599,793    564   2014  40 Years
Knoxville, TN   -    214,077    286,037    -    214,077    286,037    500,114    596   2014  40 Years
Red Bank, TN   -    229,100    302,146    -    229,100    302,146    531,246    629   2014  40 Years
New Tazewell, TN   -    91,006    328,561    -    91,006    328,561    419,567    -   2014  40 Years
Maryville, TN   -    94,682    1,529,621    -    94,682    1,529,621    1,624,303    -   2014  40 Years
Morristown, TN   -    46,404    801,506    -    46,404    801,506    847,910    -   2014  40 Years
Clinton, TN   -    69,625    1,177,927    -    69,625    1,177,927    1,247,552    -   2014  40 Years
Knoxville, TN   -    160,057    2,265,025    -    160,057    2,265,025    2,425,082    -   2014  40 Years
Sweetwater, TN   -    79,100    1,009,290    -    79,100    1,009,290    1,088,390    -   2014  40 Years
McKinney, TX   -    2,671,020    6,785,815    -    2,671,020    6,785,815    9,456,835    84,823   2014  40 Years
Forest Va   -    282,600    956,027    -    282,600    956,027    1,238,627    17,926   2014  40 Years
Waynesboro, VA   -    292,086    514,209    -    292,086    514,209    806,295    1,071   2014  40 Years
Colonial Heights, VA   -    547,692    1,059,557    -    547,692    1,059,557    1,607,249    2,207   2014  40 Years
Chester, VA   -    300,583    794,417    -    300,583    794,417    1,095,000    1,655   2014  40 Years
Midlothian, VA   -    232,337    802,602    -    232,337    802,602    1,034,939    1,672   2014  40 Years
Ashland, VA   -    426,396    965,925    -    426,396    965,925    1,392,321    2,012   2014  40 Years
Mecanicsville, VA   -    219,496    906,590    -    219,496    906,590    1,126,086    1,889   2014  40 Years
Glen Allen, VA   -    590,101    1,129,495    -    590,101    1,129,495    1,719,596    2,353   2014  40 Years
Burlington, WA   -    610,000    3,647,279    -    610,000    3,647,279    4,257,279    8,869   2014  40 Years
Wausau, WI   -    909,092    1,405,899    -    909,092    1,405,899    2,314,991    17,588      2014     40 Years
Subtotal   106,762,238    197,046,698    376,435,573    15,435,489    195,091,303    393,826,467    588,917,770    59,089,851       
                                               
Property Under Development                                              
Various   -    -    229,242    -    -    229,242    229,242    -       N/A   N/A
Sub Total   -    -    229,242    -    -    229,242    229,242    -       
                                               
Total  $106,762,238   $197,046,698   $376,664,815   $15,435,489   $195,091,303   $394,055,709   $589,147,012   $59,089,851       

 

F-31
 

 

Agree Realty Corporation  
Notes to Schedule III December 31, 2014

 

1. Reconciliation of Real Estate Properties

The following table reconciles the Real Estate Properties from January 1, 2012 to December 31, 2014.

 

   2014   2013   2012 
             
Balance at January 1  $476,168,824   $398,811,830   $340,073,911 
Construction and acquisition cost   143,365,974    82,692,554    97,418,031 
Impairment charge   (3,020,000)   (450,000)   - 
Disposition of real estate   (27,367,786)   (4,885,560)   (38,680,112)
                
Balance at December 31  $589,147,012   $476,168,824   $398,811,830 

 

2. Reconciliation of Accumulated Depreciation

The following table reconciles the Real Estate Properties from January 1, 2012 to December 31, 2014.

 

   2014   2013   2012 
             
Balance at January 1  $65,436,739   $58,856,688   $68,589,778 
Current year depreciation expense   8,361,698    6,930,145    5,726,319 
Disposition of real estate   (14,708,586)   (350,094)   (15,459,409)
                
Balance at December 31  $59,089,851   $65,436,739   $58,856,688 

 

3. Tax Basis of Building and Improvements

The aggregate cost of Building and Improvements for federal income tax purposes is approximately $14,723,000 less than the cost basis used for financial statement purposes.

 

F-32



 

Exhibit 10.10

 

AGREE REALTY CORPORATION

 

Agree Realty Corporation 2014 Omnibus Incentive Plan

(Effective May 5, 2014)

 

1.          Purposes of Plan. The purposes of this Plan are (a) to provide incentives and awards to Employees, Directors and Consultants of the Company and its Affiliates, by encouraging their ownership of Stock and (b) to aid the Company and its Affiliates in retaining such Employees, Directors and Consultants, upon whose efforts the Company’s success and future growth depends, and attracting other such individuals.

 

2.          Definitions. Except as otherwise defined in the Plan, the following terms shall have the meanings set forth below:

 

(a)          “Affiliate” means, with respect to the Company, a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company. For purposes of clarity, Affiliate shall include all Subsidiaries of the Company.

 

(b)          “Award” means individually or collectively, a grant under this Plan of Non-qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Units, Performance Shares, or Other Stock and Stock Unit Awards. Each Award shall be evidenced by an Award Agreement containing such terms and conditions as the Committee may approve, but such terms and conditions shall be consistent with any applicable terms and conditions specified in the Plan.

 

(c)          “Award Agreement” means an agreement, certificate, resolution or other form of writing or other evidence approved by the Committee which sets forth the terms and conditions of an Award. An Award Agreement may be in an electronic medium, may be limited to a notation on the Company’s books and records and, if approved by the Committee, need not be signed by a representative of the Company or a Participant.

 

(d)          “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act.

 

(e)          “Board” or “Board of Directors” means the Board of Directors of the Company.

 

(f)          “Cause” means, unless otherwise set forth in an applicable employment agreement with a Participant, Participant’s (i) commission of a crime of moral turpitude or a felony that involves financial misconduct or moral turpitude or has resulted, or reasonably could be expected to result, in imprisonment of the Participant or any adverse publicity regarding Participant or the Company or economic injury to the Company, (ii) dishonesty or willful commission or omission of any action that has resulted, or reasonably could be expected to result, in any adverse publicity regarding Participant or the Company or has caused, or reasonably could be expected to cause, demonstrable and serious economic injury to the Company, or (iii) material breach of this Agreement, any other agreement entered into between a Participant and the Company or any of Affiliates, or the Company’s policies and procedures as may be implemented from time to time (other than as a result of the Disability of Participant or other factors outside of Participant’s control) after notice and a reasonable opportunity to cure (if such breach can be cured).

 

 
 

 

(g)          “Change in Control” shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:

 

(i)          any “person,” as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any of its Subsidiaries, any trustee, fiduciary or other person or entity holding securities under any employee benefit plan of the Company or any of its Subsidiaries), together with all “affiliates” and “associates” (as such terms are defined in Rule 12b-2 under the Exchange Act) of such person, shall become the Beneficial Owner, directly or indirectly, of securities of the Company representing 40 percent or more of either (A) the combined voting power of the Company’s then outstanding securities having the right to vote in an election of the Company’s Board of Directors (“Voting Securities”) or (B) the then outstanding Shares of the Company (in either such case other than as a result of acquisition of securities directly from the company); or

 

(ii)         persons who, as of the Effective Date, constitute the Company’s Board of Directors (the “Incumbent Directors”) cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a director of the Company subsequent to the Effective Date whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors shall, for purposes of this Plan, be considered an Incumbent Director; or

 

(iii)        if (A) the Company shall consolidate with, or merge with, any other Person and the Company shall not be the continuing or surviving corporation, (B) any Person shall consolidate with, or merge with, the Company, and the Company shall be the continuing or surviving corporation and in connection therewith, all or part of the outstanding Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, (C) the Company shall be a party to a statutory share exchange with any other Person after which the Company is a Subsidiary of any other Person, or (D) the Company shall sell or otherwise transfer substantially all of the assets of the Company and its Subsidiaries (taken as a whole) to any Person or Persons.

 

Notwithstanding the foregoing, a “Change in Control” shall not be deemed to have occurred for purposes of the foregoing clause (i) solely as the result of an acquisition of securities by the Company which, by reducing the number of shares of Stock or other Voting Securities outstanding, increases (x) the proportionate number of shares of Stock beneficially owned by any person to 40 percent or more of the shares of Stock then outstanding or (y) the proportionate voting power represented by the Voting Securities beneficially owned by any person to 40 percent or more of the combined voting power of all then outstanding Voting Securities; provided, however, that if any person referred to in clause (x) or (y) of this sentence shall thereafter become the beneficial owner of any additional shares of Stock or other Voting Securities (other than pursuant to a share split, share dividend, or similar transaction or as a result of an acquisition of securities directly from the Company) and immediately thereafter beneficially owns 40 percent or more of the combined voting power of all then outstanding Voting Securities, then a “Change in Control” shall be deemed to have occurred for purposes of the foregoing clause (i).

 

2
 

 

Notwithstanding the anything else to the contrary contained in this Section 2(g) to the extent “Change in Control” is a payment trigger, and not merely a vesting trigger, for any 409A Award, a “Change in Control” shall not be deemed to have occurred unless such “Change in Control” is also a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company, as described in Treas. Reg. Section 1.409A-3(i)(5).

 

(h)          “Code” means the Internal Revenue Code of 1986 and any successor statute thereto, as amended, including the rules and regulations promulgated thereunder.

 

(i)          “Committee” means the Compensation Committee of the Board, or any other committee of the Board to the extent designated by the Board by resolution of the Board, which committee shall be constituted as provided in Section 3 hereof.

 

(j)          “Company” means Agree Realty Corporation, or any successor thereto as provided in Article 18 hereof.

 

(k)          “Consultant” means any natural person, including an advisor, engaged by the Company or an Affiliate to render bona fide services to such entity (other than in connection with the offer or sale of securities in a capital-raising transaction or to promote or maintain a market for the Company’s securities).

 

(l)          “Covered Employee” means a Participant who is a Covered Employee within the meaning of Section 162(m)(3) of the Code.

 

(m)          “Director” means a member of the Board, or a member of the board of directors of an Affiliate.

 

(n)          “Disability” or “Disabled” means with respect to any other Participant, a condition under which the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.

 

A Participant shall not be deemed to be Disabled as a result of any condition that:

 

(A) was contracted, suffered, or incurred while such Participant was engaged in, or resulted from such Participant having engaged in, a felonious activity; or

 

(B) resulted from an intentionally self-inflicted injury or an addiction to drugs, alcohol, or substances which are not administered under the direction of a licensed physician as part of a medical treatment plan.

 

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The Disability of a Participant and the date on which a Participant ceases to be employed by reason of Disability shall be determined by the Company, in accordance with uniform principles consistently applied, on the basis of such evidence as the Committee and the Company deem necessary and desirable, and its good faith determination shall be conclusive for all purposes of the Plan. The Committee or the Company shall have the right to require a Participant to submit to an examination by physicians and to submit to such reexaminations as the Committee or the Company shall require in order to make a determination concerning the Participant’s physical or mental condition; provided, however, that a Participant may not be required to undergo a medical examination more often than once each 180 days. If any Participant engages in any occupation or employment (except for rehabilitation as determined by the Committee) for remuneration or profit, which activity would be inconsistent with the finding of Disability, or if the Committee, on the recommendation of the Company, determines on the basis of a medical examination that a Participant no longer has a Disability, or if a Participant refuses to submit to any medical examination properly requested by the Committee or the Company, then in any such event, the Participant shall be deemed to have recovered from such Disability. Notwithstanding the foregoing, in the event a Participant is employed under a written employment agreement with the Company or one of its Affiliates which agreement includes a definition of “disability,” “disability” shall have the meaning set forth in such agreement; provided, however, to the extent such agreement is silent on any of the determination provisions set forth in this paragraph, such provisions shall apply.

 

The Committee in its discretion may revise this definition of “Disability” for any grant, except to the extent that the Disability is a payment event under a 409A Award, in which event the definition of “Disability” in Treas. Reg. Section 1.409A.-3(i)(4) shall apply and cannot be changed after the 409A Award is granted.

 

(o)          “Eligible Person” means any Employee, Director or Consultant and includes non-Employees to whom an offer of employment has been or is being extended.

 

(p)          “Employee” means any person whom the Company or any Affiliate classifies as an employee (including an officer) for employment tax purposes, whether or not that classification is correct. The payment by the Company of a director’s fee to a Director shall not be sufficient to constitute “employment” of such Director by the Company.

 

(q)          “Exchange Act” means the Securities Exchange Act of 1934, as amended, including the rules and regulations promulgated thereunder.

 

(r)          “Fair Market Value” means the value of a Share, determined as follows: if on the Grant Date or other determination date the Shares are listed on an established national or regional share exchange, is admitted to quotation on the Nasdaq National Market or is publicly traded on an established securities market, the Fair Market Value of a Share shall be the closing price of the Shares on such exchange or in such market (if there is more than one such exchange or market the Committee shall determine the appropriate exchange or market) on the Grant Date or such other determination date; or if there is no such reported closing price, the Fair Market Value shall be the mean between the high and low sale prices on such trading day, or if no sale of Shares is reported, the mean between the highest bid and lowest asked price on such trading day, or, if no bid and asking price is reported for such trading day, the reported closing price on the next preceding day on which any sale shall have been reported. If the Shares are not listed on such an exchange, quoted on such system or traded on such a market, the Fair Market Value shall be the value of the Shares as determined by the Committee in good faith; provided that such valuation with respect to any Award that the Company intends to be a stock right not providing for the deferral of compensation under Treas. Reg. Section 1.409A-1(b)(5)(i) (Non-Qualified Options) shall be determined by the reasonable application of a reasonable valuation method, as described in Treas. Reg Section 1.409A-1(b)(5)(iv)(B). In the case of an Incentive Stock Option, if the foregoing method of determining fair market value is inconsistent with Section 422 of the Code, then Fair Market Value shall be determined by the Committee in a manner consistent with such section of the Code and shall mean the value so determined.

 

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(s)          “409A Award” means any Award that is treated as a deferral of compensation subject to the requirements of Section 409A of the Code.

 

(t)          “Grant Date” means the date on which an Award is made by the Committee or the Board of Directors under this Plan or such later date as may be specified by the Committee or the Board.

 

(u)          “Incentive Stock Option” or “ISO” means an option to purchase Stock, granted under Section 6 hereof, which is designated as an incentive stock option and is intended to meet the requirements of Section 422 of the Code.

 

(v)          “Non-qualified Stock Option” or “NQSO” means an option to purchase Stock, granted under Section 6 hereof, which is not intended to be an Incentive Stock Option.

 

(w)          “Option” means an Incentive Stock Option or a Non-qualified Stock Option.

 

(x)          “Option Price” means the exercise price for each Share subject to an Option.

 

(y)          “Optionee” means the holder of an Option.

 

(z)          “Other Stock and Stock Unit Award” means awards of unrestricted Shares, or other awards that are valued in whole or in part by reference to, or are otherwise based on, Shares or other securities of the Company.

 

(aa)         “Outside Director” means a member of the Board who is not an employee of the Company or any Affiliate.

 

(bb)         “Participant” means any Eligible Person who has been granted an Award under the Plan.

 

(cc)         “Performance Award” means a performance-based Award, which may be in the form of either Performance Shares or Performance Units.

 

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(dd)         “Performance Measures” means one or more of the following selected by the Committee to measure Company, Affiliate, and/or business unit performance for a Performance period, whether in absolute or relative terms (including, without limitation, terms relative to a peer group or index): (i) total shareholder return (share price appreciation plus dividends), (ii) net income, (iii) earnings per share, (iv) funds from operations (as defined by the National Association of Real Estate Investment Trusts), (v) funds from operations per share, (vi) return on equity, (vii) return on assets, (viii) return on invested capital, (ix) increase in the market price of shares or other securities, (x) achieving specified reductions in costs or targeted levels in costs; (xi) achieving specified improvements in collection of outstanding accounts or specified reductions in non-performing debts; (xii) acquiring or developing a prescribed number of (or dollar volume related to) real estate properties, or maintaining a prescribed number of (or dollar volume related to) existing real estate properties; (xiii) achieving or maintaining a level of occupancy at one or more real estate properties; (xiv) completing specified projects within or below the applicable budget; (xv) completing acquisitions or dispositions of other businesses or assets, or integrating acquired businesses or assets; and (xvi) expanding into new markets. Subject to any exceptions noted in this Section 2(dd), Section 9(d) hereof, or any Award Agreement and any exceptions approved by the Committee, each such objective shall be, to the extent applicable, determined in accordance with generally accepted accounting principles as consistently applied by the Company. Performance Measures may vary from performance period to performance period and from Participant to Participant, and may be established on a stand-alone basis, in tandem or in the alternative.

 

(ee)         “Performance Share” means an Award, designated as a Performance Share, granted to a Participant pursuant to Section 9 hereof, the value of which is determined by the Fair Market Value of the Stock in a manner deemed appropriate by the Committee and described in the Award Agreement.

 

(ff)         “Performance Unit” means an Award, designated as a Performance Unit, granted to a Participant pursuant to Section 9 hereof, the value of which is determined, in whole or in part, by the attainment of preestablished goals relating to Company financial or operating performance as deemed appropriate by the Committee and described in the Award Agreement.

 

(gg)         “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock is restricted, pursuant to Section 8 hereof.

 

(hh)         “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d)(3).

 

(ii)         “Plan” means the Agree Realty Corporation 2014 Omnibus Incentive Plan, as hereafter amended.

 

(jj)         “Related Option” means an Incentive Stock Option or a Non-qualified Stock Option granted in conjunction with the grant of a Stock Appreciation Right.

 

(kk)         “Restricted Stock” means an Award, designated as Restricted Stock, granted to a Participant pursuant to Section 8 hereof.

 

(ll)         “Restricted Stock Unit” means an Award, designated a Restricted Stock Unit, granted to a Participant pursuant to Section 8 hereof.

 

(mm)         “Retirement” means termination of employment or service by a Participant with the consent of the Committee on or after age 65, or any other definition established by the Committee, in its discretion, either in any Award or in writing after the grant of any Award, provided that the definition of Retirement with respect to the timing of payment (and not merely vesting) of any 409A Award cannot be changed after the Award is granted.

 

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(nn)         “Rule 16b-3” means Rule 16b-3 adopted pursuant to Section 16(b) of the Exchange Act.

 

(oo)         “SAR Exercise Price” means the per share exercise price of an SAR granted to a Participant under Section 7 hereof.

 

(pp)         “Secretary” means the officer designated as the Secretary of the Company.

 

(qq)         “Section 16 Person” means a Participant who is subject to Section 16(b) of the Exchange Act with respect to transactions involving Stock.

 

(rr)         “Stock” or “Shares” means the common stock of the Company, $0.01 par value.

 

(ss)         “Stock Appreciation Right” or “SAR” means an Award, designated as a Stock Appreciation Right, granted to a Participant pursuant to Section 7 hereof.

 

(tt)         “Subsidiary” means a subsidiary of the Company within the meaning of Section 424(f) of the Code.

 

(uu)         “Substitute Award” means any Award granted or issued to a Participant in assumption of, or in substitution for, outstanding awards, or the right or obligation to make future awards by a company acquired by the Company or with which the Company combines (by merger, asset acquisition or otherwise).

 

(vv)         “Ten Percent Shareholder” means an individual who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding shares of the Company, its parent, or any of their Subsidiaries. In determining share ownership, the attribution rules of Section 424(d) of the Code shall be applied.

 

3.          Administration.

 

(a)          The Plan shall be administered by or pursuant to the direction of the Committee, provided that the Board may exercise all of the Committee’s powers, authority and obligations under this Plan (and any Award Agreement) at any time, in whole or in part, in the Board’s discretion. All determinations and interpretations made by the Committee shall be final, conclusive and binding on all persons, including Participants and their legal representatives and beneficiaries. No member of the Committee or the Board shall be liable to any person for any such action taken or determination made in good faith with respect to the Plan or any Award or Award Agreement. Unless the Board determines otherwise, (i) all members of the Committee shall be “outside directors” as described in Section 162(m) of the Code, and (ii) no person shall be appointed to or serve as a member of the Committee unless at the time of such appointment and service he shall be a “non-employee director,” as defined in Rule 16b-3.

 

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(b)          The Committee, subject to the terms of the Plan, shall have plenary authority to establish such rules and regulations, make such determinations and interpretations, and take such other administrative actions as it deems necessary or advisable to the administration of the Plan, any Award or any Award Agreement. The express grant in this Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. In addition to any other powers and, subject to the provisions of the Plan, the Committee shall have the authority to:

 

(i)          grant Awards and determine the terms and conditions of the Awards;

 

(ii)         determine the Participants to whom and the times at which Awards shall be granted;

 

(iii)        determine all terms and provisions of each Award Agreement, which need not be identical;

 

(iv)         construe and interpret the Award Agreements and the Plan;

 

(v)          establish, amend, or waive rules or regulations for the Plan’s administration;

 

(vi)         to accelerate the exercisability of any Award, the end of a performance period or termination of any Period of Restriction;

 

(vii)        establish the rights of Participants with respect to an Award upon termination of employment or service as a Director;

 

(viii)      determine whether, to what extent, and under what circumstances an Award may be settled, forfeited, exchanged or surrendered;

 

(ix)         amend the terms of previously granted Awards so long as the terms as amended are consistent with the terms of the Plan and provided that the consent of the Participant is obtained with respect to any amendment that would be detrimental to the Participant, except that such consent will not be required if such amendment is for the purpose of complying with Rule 16b-3 or any requirement of the Code applicable to the Award; and

 

(x)          make all other determinations and take all other actions necessary or advisable for the administration of the Plan.

 

Notwithstanding the foregoing, neither the Committee nor the Board shall effect at any time directly or indirectly the repricing of any outstanding Options or SARs without shareholder approval, including without limitation a repricing by (i) the cancellation of any outstanding Options or SARs under the Plan and the grant in substitution therefor of new Options or SARs under the Plan covering the same or different amount of Shares, or (ii) the cancellation of any outstanding Options or SARs with respect to which the Option Price or SAR Exercise Price is above Fair Market Value in exchange for a cash payment.

 

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Unless otherwise specified in an Award Agreement, the Company retains the right to cause a forfeiture of any Award, or the gain realized by a Participant in connection therewith, on account of actions taken by the Participant in violation or breach of or in conflict with any employment agreement, non-competition agreement, any agreement prohibiting solicitation of employees or customers of the Company or its Affiliates, any confidentiality obligation with respect to the Company or its Affiliates, or any other policy of or agreement with the Company or its Affiliates, or as otherwise permitted by applicable laws and regulations, including but not limited to, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules and regulations promulgated under each respective act.

 

(c)          All such actions and determinations shall be made in accordance with the Company’s governing documents and applicable law. Subject to the governing documents of the Company and applicable law, the Committee may delegate all or any portion of its authority under the Plan to a subcommittee of members of the Board and/or officers of the Company for the purposes of determining or administering Awards granted to persons who are not then subject to the reporting requirements of Section 16 of the Exchange Act. The Committee’s prior exercise of discretionary authority shall not obligate it to exercise its authority in a similar fashion thereafter.

 

4.          Stock Available. 

 

(a)          Reserved Shares. Subject to adjustment as provided in Section 13 hereof, the maximum aggregate number of Shares that may be issued pursuant to Awards made under the Plan shall not exceed 700,000, all of which shall be available for issuance as Incentive Stock Options. Shares used for purposes of the Plan may be either authorized and unissued Shares, or previously issued Shares held in the treasury of the Company, or both.

 

(b)          Accounting for Shares.

 

(i)          Except as provided in this Section 4, for every Share subject to Awards, the Shares available for grant hereunder shall be reduced by one Share. Awards to be settled only in cash shall not be counted against the Share limit above.

 

(ii)         With respect to Performance Awards which are payable in Shares (whether in whole or in part, as elected by the Participant at the time such Award is settled), the maximum number of Shares shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan, subject to Section 4(b)(v) below.

 

(iii)        Awards not denominated, but potentially payable, in Shares shall be counted against the aggregate number of Shares available for granting Awards under the Plan in such amount and at such time as the Awards are settled in Shares; provided, however, that Awards that operate in tandem with (whether granted simultaneously with or at a different time from), or that are substituted for, other Awards may only be counted once against the aggregate number of Shares available, and the Committee shall adopt procedures, as it deems appropriate, in order to avoid double counting.

 

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(iv)         Substitute Awards shall not be counted against the Shares available for granting Awards under this Plan. Shares available under a shareholder approved equity plan acquired in a corporate acquisition or merger (each, a “pre-existing plan”) may be used for post-transaction Awards under this Plan without counting against the Shares reserved in Section 4(a) provided that (i) the number of Shares available for grant is appropriately adjusted to reflect the relative value of the Shares and the shares subject to the acquired entity’s equity plan, (ii) any such Award is not made beyond the period when it could have been granted under the pre-existing plan absent such transaction, and (iii) any such Award is not granted to individuals who were employed by the Company or its Affiliates immediately before the closing of such transaction. The provisions of this Section 4(b)(iv) shall be interpreted consistent with the applicable listing requirements.

 

(v)          If any Shares covered by an Award are not purchased or are forfeited, or if an Award otherwise terminates without delivery of all or a portion of the Shares subject thereto (including the settlement of any Performance Awards in cash rather than Shares), then all or a portion, as applicable, of the number of Shares related to such Award shall not be counted against the Share limit above, but shall again be available for making Awards under the Plan.

 

(vi)         Notwithstanding anything herein to the contrary, Shares subject to an Award under the Plan may not again be made available for issuance under the Plan if such Shares are (x) Shares that were subject to an Option or a share-settled SAR and were not issued upon the net settlement or net exercise of such Option or SAR, (y) Shares delivered to or withheld by the Company or any Affiliate to pay the exercise price or the withholding taxes under an Option or SAR or (z) Shares repurchased on the open market with the proceeds of an Option exercise.

 

5.          Award Eligibility and Limitations. 

 

(a)          General Rule. Awards under the Plan may be granted to any Eligible Person, provided that only Employees shall be eligible to receive Incentive Stock Options. Awards may be granted to Eligible Persons whether or not they hold or have held Awards previously granted under the Plan or otherwise granted or assumed by the Company. In selecting Eligible Persons for Awards, the Committee may take into consideration any factors it may deem relevant, including its views of the Eligible Person’s present and potential contributions to the success of the Company and its Affiliates.

 

(b)          Limitations. During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, the number of Shares that may be granted in the form of any type of Award under this Plan in a single fiscal year to a Participant may not exceed 100,000 Shares, subject to adjustment as provided in Section 13, and excluding any Substitute Awards or other Awards described in Section 4(b)(iv) above. For avoidance of doubt, the maximum limit described in the immediately preceding sentence shall separately apply to Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, and Other Stock and Stock Unit Awards under Section 10 below. In addition, the maximum Performance Award opportunity that may be granted in any fiscal year and payable in cash to a Participant is $5 million, excluding any Substitute Awards or other Awards described in Section 4(b)(iv) above.

 

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6.          Stock Options.

 

(a)          Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants as shall be determined by the Committee in its discretion; provided, however, ISOs may only be granted to Employees. Subject to Sections 4 and 5 hereof, the Committee shall have complete discretion in determining the number of Shares subject to Options granted to each Participant.

 

(b)          ISO $100,000 Limitation. To the extent that the aggregate Fair Market Value of Shares (determined at the Grant Date) with respect to which Options designated as ISOs first become exercisable by a Participant in any calendar year (under this Plan and any other plan or agreement of the Company or any Affiliate) exceeds $100,000 (or such other amount as may be specified in Section 422 of the Code), such excess Options shall be treated as Non-qualified Stock Options.

 

(c)          Option Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the terms of the Option, including the Option Price, the duration of the Option, the number of Shares to which the Option pertains, any conditions imposed upon the exercisability of Options in the event of retirement, death, disability, or other termination of employment or service, and such other provisions as the Committee shall determine. The Award Agreement shall also specify whether the Option is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code, or a Non-qualified Stock Option, provided that the Options will be deemed Non-qualified Stock Options in the absence of such specification.

 

(d)          Option Price. The Option Price shall be determined by the Committee subject to the following limitations. In the case of an ISO, the Option Price shall not be less than 100% of the Fair Market Value of such Stock on the Grant Date, or in the case of any Optionee who is a Ten Percent Shareholder at the Grant Date, such Option Price shall not be less than 110% of the Fair Market Value of such Stock on the Grant Date. In the case of a NQSO, the Option Price shall not be less than 100% of the Fair Market Value of the Stock on the Grant Date. In no event shall the Option Price of any Option be less than the par value of the Stock.

 

(e)          Duration of Options. Each Option shall expire as set forth in the Award Agreement, provided, however, that no Option shall be exercisable later than the tenth anniversary date of its Grant Date and no ISO which is granted to any Optionee who, at the time such ISO is granted, is a Ten Percent Shareholder, shall be exercisable after the fifth anniversary date from such Grant Date.

 

(f)          Exercisability. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as set forth in the Award Agreement, which need not be the same for all Participants. An Option may not be exercised for a fraction of a Share.

 

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(g)          Method of Exercise. In order to exercise an option, the Optionee shall deliver to the Company properly executed exercise notice specifying the number of shares of Stock to be purchased, together with cash or a certified or bank cashier’s check payable to the order of the Company in the aggregate amount of the Option Price therefor, provided that the Committee may, in its discretion permit a Participant to satisfy such aggregate Option Price by one or more of the following methods, in each case, to the extent permitted by applicable laws: (i) a reduction in Shares issuable upon exercise which have a value at the time of exercise that is equal to the Option Price, (ii) delivery of irrevocable instructions to a stockbroker to sell immediately some or all of the Shares acquired by exercise of the Option and to promptly deliver to the Company an amount of the sale proceeds sufficient to pay the aggregate Option price, (iii) delivery of previously owned Shares having a Fair Market Value on the date of exercise equal to the aggregate purchase price, or (iii) any other form that is consistent with, or permitted by, applicable laws, regulations and rules. An Optionee shall have none of the rights of a shareholder until the date as of which Shares are issued to him. For purposes of payment described in (i) above, the exercise shall be deemed to have occurred on the date the Company receives the exercise notice, accompanied by the stockbroker instructions, unless the Committee determines otherwise.

 

(h)          Limitation on Exercise of Options. Notwithstanding the terms of any Award Agreement to the contrary, the Committee shall have the absolute discretion to impose a “blackout” period on the exercise of an Option with respect to any or all Participants (including those whose employment or service has terminated) to the extent that it determines that doing so is required or desirable in order to comply with applicable securities laws, provided that, if any blackout period occurs, the term of the Option shall not expire until the earlier of (i) 30 days after the blackout period ends or (ii) the tenth (10th) anniversary of the Grant Date. The Committee shall have the discretion to determine whether and to what extent the vesting of Options shall be tolled during any unpaid leave of absence; provided, however, that in the absence of such determination, vesting of Options shall be tolled during any such leave of absence approved by the Company; provided, further that in the case of an ISO, any such determination satisfies the requirements of Section 422 of the Code.

 

(i)          Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement, in the event a Participant’s employment or service with the Company and its Affiliates is terminated before exercise of an Option, the following rules shall apply:

 

(i)          Generally. An Option may be exercised after the date of the Participant’s termination of employment or service, as applicable, only to the extent that the Option was vested as of the date of such termination. Any Option not vested at the time of a Participant’s termination of employment or service, as applicable, shall terminate and the Shares underlying such Option shall revert to the Plan and become available for future Awards. A vested Option may not be exercised after the expiration of one of the periods described below in (ii) through (iv) or after the expiration of the Term of such Option as set forth in the Award Agreement.

 

(ii)         Termination upon death or Disability. If a Participant’s employment or service, as applicable, is terminated due to his death or Disability, the Participant (or the Participant’s beneficiary) may exercise the vested portion of a Non-Qualified Stock Option for up to one year after the date of the Participant’s termination of employment or service, as applicable, but in no event later than the date of expiration of the Option.

 

(iii)        Termination for Cause. If the Participant’s termination of employment or service, as applicable, is terminated by an Employer for Cause, any outstanding Option (whether vested or unvested) will immediately expire and be forfeited upon such termination.

 

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(iv)         Other Terminations. Upon any other termination of employment or service, as applicable, other than for the reasons set forth in subsections (ii) or (iii) above or as set forth in Section 12, the Participant may exercise the vested portion of the Option for up to 90 days after the date of the Participant’s termination of employment or service, as applicable, but in no event later than the date of expiration of the Option.

 

(j)          Non-transferability of Options.

 

(i)          Subject to Sections 6(j)(ii) and 20(b) hereof, no Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Subject to Sections 6(j)(ii) and 20(b) hereof, during the lifetime of a Participant, the Option may be exercised only by the Participant or his guardian or legal representative.

 

(ii)         The Committee may grant Non-qualified Stock Options (with or without tandem SARs) that are transferable during the lifetime of the Participant but only to the extent consistent with applicable laws and registration requirements, provided that (A) no consideration is paid for the transfer and (B) no Options granted to Section 16 Persons may be transferable unless and except to the extent such transferability would not result in the loss of any Rule 16b-3 exemptions for nontransferable Options granted or to be granted under the Plan; provided, that, in the absence of such provisions in the Award Agreement, the Options will be non-transferable except as provided in Section 6(j)(i) hereof. The transferee of an Option shall be subject to all restrictions applicable to the Option prior to its transfer. The Award Agreement granting the Option shall set forth the transfer conditions and restrictions. The Committee may impose on any transferable Option and on Stock issued upon the exercise of an Option such limitations and conditions as the Committee deems appropriate.

 

7.          Stock Appreciation Rights.

 

(a)          Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, Stock Appreciation Rights may be granted to Participants, at the discretion of the Committee, in any of the following forms:

 

(i)          In connection with the grant, and exercisable in lieu, of Options (“Tandem SARs”);

 

(ii)         In connection with, and exercisable in addition to, the grant of Options (“Additive SARs”);

 

(iii)        Independent of the grant of Options (“Freestanding SARs”); or

 

(iv)         In any combination of the foregoing.

 

(b)          Exercise Price. The SAR Exercise Price shall be determined in the sole discretion of the Committee and set forth in the applicable Award Agreement, and shall be no less than 100% of the Fair Market Value of a Share on the Grant Date. The SAR Exercise Price of a Tandem SAR or an Additive SAR shall be the same as the Option Price of the Related Option.

 

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(c)          Exercise of Tandem SARs. Tandem SARs may be exercised with respect to all or part of the Shares subject to the Related Option. The exercise of Tandem SARs shall cause a reduction in the number of Shares subject to the Related Option equal to the number of Shares with respect to which the Tandem SAR is exercised. Conversely, the exercise, in whole or part, of a Related Option, shall cause a reduction in the number of Shares subject to the Tandem SAR equal to the number of Shares with respect to which the Related Option is exercised. Shares with respect to which the Tandem SAR shall have been exercised may not be subject again to an Award under the Plan.

 

Notwithstanding any other provision of the Plan to the contrary, a Tandem SAR shall expire no later than the expiration of the Related Option and shall be exercisable only when the Related Option is eligible to be exercised. In addition, if the Related Option is an ISO, a Tandem SAR shall be exercised for no more than 100% of the difference between the Fair Market Value of Shares subject to the Related Option at the time the Tandem SAR is exercised and the Option Price of the Related Option.

 

(d)          Exercise of Additive SARs. Additive SARs shall be deemed to be exercised upon, and in addition to, the exercise of the Related Option. The deemed exercise of Additive SARs shall not reduce the number of Shares with respect to which the Related Option remains unexercised.

 

(e)          Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon such SARs.

 

(f)          Other Conditions Applicable to SARs. In no event shall the term of any SAR granted under the Plan exceed ten years from the Grant Date. A SAR may be exercised only when the Fair Market Value of a Share exceeds either (i) the Fair Market Value per Share on the Grant Date in the case of a Freestanding SAR or (ii) the Option Price of the Related Option in the case of either a Tandem SAR or Additive SAR. A SAR shall be exercised by delivery to the Committee of a notice of exercise in the form prescribed by the Committee.

 

(g)          Payment Upon Exercise of SARs. Subject to the provisions of the Award Agreement, upon the exercise of a SAR, the Participant shall be entitled to receive, without any payment to the Company (other than required tax withholding amounts), an amount equal to the product of multiplying (i) the number of Shares with respect to which the SAR is exercised by (ii) an amount equal to the excess of (A) the Fair Market Value per Share on the date of exercise of the SAR over (B) SAR Exercise Price.

 

Payment to the Participant shall be made in Shares, valued at the Fair Market Value of the date of exercise, in cash, or a combination thereof, as the Committee may provide in the Award Agreement. To the extent required to satisfy the conditions of Rule 16b-3(e), or as otherwise provided in the Award Agreement, the Committee shall have the sole discretion to consent to or disapprove the election of any Participant to receive cash in full or partial settlement of an SAR. In cases where an election of settlement in cash must be consented to by the Committee, the Committee may consent to, or disapprove, such election at any time after such election, or within such period for taking action as is specified in the election, and failure to give consent shall be disapproval. Consent may be given in whole or as to a portion of the SAR surrendered by the Participant. If the election to receive cash is disapproved in whole or in part, the SAR shall be deemed to have been exercised for Shares, or, if so specified in the notice of exercise and election, not to have been exercised to the extent the election to receive cash is disapproved.

 

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(h)          Non-transferability of SARs. No SARs granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution, unless the Committee provides otherwise pursuant to Section 20(b) hereof. Further, all SARs granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or legal representative.

 

8.          Restricted Stock and Restricted Stock Units.

 

(a)          Grant of Restricted Stock or Restricted Stock Units. Subject to the terms and provisions of the Plan, the Committee may grant awards of Restricted Stock or Restricted Stock Units under the Plan to such Participants and in such amounts as it shall determine. Participants receiving such awards shall not be required to pay the Company therefor (except for applicable tax withholding) other than the rendering of services and/or until other conditions are satisfied as determined by the Committee in its sole discretion, unless required by applicable law. Any grant of an Award under this Section 8 or the vesting thereof may be further conditioned upon the attainment of Performance Measures established by the Committee in accordance with the applicable provisions of Section 9 regarding Performance Awards.

 

(b)          Award Agreement. Each award of Restricted Stock or Restricted Stock Units shall be evidenced by an Award Agreement that shall specify the additional terms of the Award, including the Period of Restriction, the conditions which must be satisfied prior to removal of the restriction, the number of Shares granted or relating to such award, and such other provisions as the Committee shall determine.

 

(c)          Transferability. Except as provided in this Section 8, neither the Shares of Restricted Stock or Restricted Stock Units granted hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of the applicable Period of Restriction or upon earlier satisfaction of such other conditions as may be specified by the Committee in its sole discretion and set forth in the Award Agreement. All rights with respect to the Restricted Stock or Restricted Stock Units granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or legal representative.

 

(d)          Other Restrictions. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, restrictions under applicable Federal or state securities laws, and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. Alternatively, the Committee, in its sole discretion, may have Shares of Restricted Stock issued without legend and held by the Secretary until such time that all restrictions are satisfied.

 

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(e)          Restricted Stock Certificate Legend. In the event that the Committee elects to legend the certificates representing Restricted Stock, and in addition to any legends placed on certificates pursuant to Section 8(d) hereof, each certificate representing shares of Restricted Stock granted pursuant to the Plan shall bear the following legend:

 

“The sale or other transfer of the shares of Stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer set forth in the Agree Realty Corporation 2014 Omnibus Incentive Plan, effective May 5, 2014, as amended, and in a Restricted Stock Agreement dated ________ ___, 20___. A copy of the Plan and such Restricted Stock Agreement may be obtained from the Secretary of Agree Realty Corporation.”

 

(f)          Removal of Restrictions. Except as otherwise provided in this Section 8, Shares of Restricted Stock shall become freely transferable by the Participant after the last day of the Period of Restriction and/or upon the satisfaction of other conditions as determined by the Committee in its sole discretion. Once the Shares are released from the restrictions, the Participant shall be entitled to have removed any legend that may have been placed on the certificates representing such Shares pursuant to Sections 8(d) and 8(e) hereof.

 

(g)          Rights of Holders of Shares of Restricted Stock. Unless the Committee otherwise provides in an Award Agreement, holders of Shares of Restricted Stock shall have the right to vote such Shares and the right to receive any dividends or distributions declared or paid with respect to such Shares. All distributions, if any, received by a Participant with respect to Restricted Shares as a result of any share split, share dividend, combination of shares, or other similar transaction shall be subject to the restrictions applicable to the original Award. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability as the Shares of Restricted Stock with respect to which they were distributed and the Shares shall bear legends reflecting such restrictions.

 

(h)          Rights of Holders of Restricted Stock Units. Unless the Committee otherwise provides in an Award Agreement, holders of Restricted Stock Units shall have no rights as shareholders of the Company. The Committee may provide in an Award Agreement evidencing a grant of Restricted Stock Units that the holder of such Restricted Stock Units shall be entitled to receive, upon the payment of a cash dividend or distribution on outstanding Shares, or at any time thereafter, a cash payment for each Restricted Stock Unit held equal to the per-share dividend, which payment would be paid in accordance with rules set forth by the Committee. A holder of Restricted Stock Units shall have no rights other than those of a general creditor of the Company. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement.

 

(i)          Settlement of Restricted Stock Units. Settlement of earned Restricted Stock Units will be made upon the date(s) determined by the Committee and set forth in the Award Agreement. The Committee may, in its sole discretion, settle earned Restricted Stock Units in cash, Shares, or a combination of both.

 

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(j)          Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement, in the event a Participant’s employment or service with the Company and its Affiliates is terminated before vesting of any Shares of Restricted Stock or Restricted Stock Units, any Share of Restricted Stock or Restricted Stock Unit that is not vested at the time of a Participant’s termination of employment or service, as applicable, shall be forfeited. Upon forfeiture, the Participant shall have no further rights with respect to such Award, including the right to vote such Shares or the right to receive dividends with respect to such Shares.

 

9.          Performance Awards.

 

(a)          Grant of Performance Awards. Subject to the terms and provisions of the Plan, the Committee may authorize grants of Performance Awards to Participants in the form of either Performance Units or Performance Shares, and such Awards shall be evidenced by an Award Agreement. Each Award Agreement shall specify the additional terms of the Performance Awards, including the number of Performance Units or Performance Shares (subject to Section 13 hereof), the time and manner in which such Award shall be settled, the performance period to which it relates, the applicable Performance Measures, and such other terms and conditions as the Committee determines consistent with the terms of the Plan. Subject to Section 4 and 5 hereof, the Committee shall have complete discretion in determining the size of any Performance Award granted to Participants hereunder. Participants receiving Performance Awards shall not be required to pay the Corporation therefor (except for applicable tax withholding) unless required by applicable law.

 

(b)          Performance Period. The performance period with respect to each Performance Award shall be set forth in the Award Agreement, and may be subject to earlier termination in the event of a termination of employment or service.

 

(c)          Performance Measures. Each Award Agreement for Performance Awards shall specify the Performance Measures that are to be achieved by the Participant and a formula for determining the settlement amount to be paid (in the form provided in Section 9(f) hereof) if the Performance Measures are achieved. The Committee may establish a pool that will be funded based on the achievement of Performance Measures or a percentage of any of the underlying business criteria, provided that if such design feature is intended to apply to Covered Employees, such feature must meet the requirements of Section 162(m) of the Code. In addition, the Committee may exercise negative discretion to reduce the amount of, or eliminate, a Performance Award that otherwise would be payable pursuant to this Section 9, but may not increase any amount payable under a Performance Award intended to qualify as “performance-based compensation” for purposes of Section 162(m) of the Code.

 

(d)          Adjustments relating to Performance Measures. The Committee is authorized to exclude one or more of the following items in establishing Performance Measures for Performance Awards: (1) extraordinary items outside the ordinary course of business, including acquisitions, dispositions, restructurings; (2) accounting policy changes required by the U.S. Securities and Exchange Commission or the U.S. Financial Accounting Standards Board; (3) the effect of any change in the outstanding shares of Stock by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, share repurchase, combination or exchange of shares or other similar corporate change, or any distributions to common shareholders other than regular cash dividends; and (4) any other objective criteria established by the Committee. Notwithstanding the foregoing, any determinations by the Committee to exclude such items with respect to a Performance Award granted to a Covered Employee and intended to constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Code must be made before the first to occur of 90 days after the commencement of the period of service to which the performance goals relate and the lapse of 25% of the period of service to which the performance goals relate.

 

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(e)          Performance Awards Granted to Designated Covered Employees. If and to the extent that the Committee determines that a Performance Award to be granted to a Participant who is designated by the Committee as likely to be a Covered Employee should qualify as “performance-based compensation” for purposes of Section 162(m) of the Code, the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of pre-established performance goals and other terms set forth in this Section9(e).

 

(i)          Performance Goals Generally. The performance goals for such Performance Awards shall consist of one or more Performance Measures, as specified by the Committee and meet the requirements of this Section 9(e). Performance goals shall be objective and shall otherwise meet the requirements of Section 162(m) of the Code, including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being “substantially uncertain.” The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants.

 

(ii)         Timing For Establishing Performance Goals. Performance goals shall be established, in writing, not later than the first to occur of 90 days after the commencement of the period of service to which the performance goals relate and the lapse of 25% of the period of service to which the performance goals relate, or at such other date as may be required for “performance-based compensation” under Section 162(m) of the Code.

 

(iii)        Committee Certification. Prior to the settlement of any Award that is contingent on the achievement of one or more Performance Measures, the Committee shall certify in writing that the applicable performance goals and any other material terms of the Award were in fact satisfied. For purposes of this Section 9(e)(iii), approved minutes of the Committee shall be adequate written certification.

 

(iv)         Status Performance Awards Under Section 162(m) of the Code. It is the intent of the Company that Performance Awards under this Section 9(e) granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Section 162(m) of the Code shall, if so designated by the Committee, constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Code. Accordingly, the terms of this Section 9(e), including the definitions of Covered Employee and other terms used herein, shall be interpreted in a manner consistent with Section 162(m) of the Code. The foregoing notwithstanding, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of Performance Awards, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan or any Award Agreement relating to such Performance Awards does not comply or is inconsistent with the requirements of Section 162(m) of the Code, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements..

 

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(f)          Form of Payment. Payment of the amount to which a Participant shall be entitled upon the settlement of Performance Award shall be made in cash, Stock, other property or a combination thereof as set forth in the Award Agreement. Payment may be made in a lump sum or installments as prescribed by the Committee.

 

(g)          Non-transferability. Unless the Committee provides otherwise pursuant to Section 20(b) hereof, no Performance Units or Performance Shares granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. All rights with respect to Performance Units and Performance Shares granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or personal representative.

 

(h)          Dividends or Dividend Equivalent Rights for Performance Awards. Notwithstanding anything to the foregoing in the Plan, the right to receive dividends, dividend equivalent rights or distributions with respect to a Performance Award shall only be earned by a Participant if and to the extent that the underlying Performance Award is earned by the Participant, and shall be paid in the same time and manner as the underlying Performance Award.

 

(i)          Voting Rights. During the performance and vesting periods, Participants in whose name Performance Shares are granted hereunder may not exercise voting rights with respect to those Shares.

 

(j)          Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement, in the event a Participant’s employment or service with the Company and its Affiliates is terminated before the Performance Shares or Performance Units are earned and vested, such Performance Shares and/or Performance Units shall be forfeited.

 

10.         Other Stock and Stock Unit Awards.

 

(a)          Grant. The Committee is authorized to grant to Participants, either alone or in addition to other Awards made under the Plan, Other Stock and Stock Unit Awards to be issued at such times, subject to or based upon achievement of such performance or other goals and on such other terms and conditions as the Committee shall deem appropriate and specify in the Award Agreement relating thereto, which need not be the same with respect to each Participant. Stock or other securities granted pursuant to Other Stock and Stock Unit Awards may be issued for no cash consideration or for such minimum consideration as may be required by applicable law.

 

(b)          Sale and Transferability. To the extent an Other Stock and Stock Unit Award granted under the Plan is deemed to be a derivative security within the meaning of Rule 16b-3, it may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution, unless the Committee provides otherwise pursuant to Section 20(b) hereof. All rights with respect to such Other Stock and Stock Unit Awards granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or personal representative.

 

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(c)          Termination of Service. Unless otherwise set forth in the Award agreement, if, with respect to any Award, a Participant’s termination of employment or service, as applicable, occurs before the end of any period of restriction or non-transfer, or the vesting date applicable to such Award (or the applicable portion of such Award), or any performance goals or other vesting conditions are not achieved in whole or in part (as determined by the Committee) by the end of the period for measuring such goals and conditions, then all such then unvested and/or unearned Awards shall be forfeited by the Participant.

 

11.         Effect of Termination of Employment or Service on Awards; Forfeiture.

 

(a)          Generally. Subject to Section 3(b) hereof, the Committee may provide in any Award Agreement the circumstances in which Awards shall be exercised, vested, paid or forfeited in the event a Participant’s service or employment with the Company or an Affiliate terminates prior to the end of a performance period, Period of Restriction or the exercise, vesting or settlement of such Award. Notwithstanding any other provision of this Plan to the contrary, in the event of a Participant’s termination of employment or service (including by reason of death, Disability, or Retirement), or business divestiture, leave of absence approved by the Company, or in the event of hardship or other special circumstances, the Committee may in its sole discretion take any action that it deems to be equitable under the circumstances or in the best interests of the Company, including, without limitation, waiving or modifying any limitation or requirement with respect to any Award under this Plan. However, any such actions taken by the Committee shall be subject to Section 3(b) hereof and should comply with the requirements of Code Sections 409A and 162(m) (and, with the latter, only to the extent such award is intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code).

 

(b)          Transfers between Employers. Awards under the Plan shall not be affected by the change of a Participant’s status within or among the Company and any Affiliate, so long as the Participant continues to be employed by or provide services to the Company or an Affiliate. For purposes of the Plan and any Award hereunder, if an entity that a Participant is employed by or otherwise providing services to ceases to be an Affiliate, a Participant shall be deemed to terminate employment or service, as applicable, on the date of the entity’s change in status, unless the Participant continues as a service provider in respect of the Company or another Affiliate (after giving effect to the change in status).

 

12.         Change in Control. Except as otherwise provided in an Award Agreement, in the event of a Change in Control or immediately prior to a Change in Control of the Company, the Committee may, but is not obligated to, without Participant consent (a) accelerate, vest or cause the restrictions to lapse with respect to, all or any portion of an Award, (b) cancel Awards for a cash payment equal to their fair value (as determined in the sole discretion of the Committee) which, in the case of Options and SARs, shall be deemed to be equal to the excess, if any, of value of the per Share consideration to be paid in the Change in Control transaction over the aggregate Option Price (in the case of Options) or SAR Exercise Price (in the case of SARs), or (c) cause any or all restrictions or conditions related to an Award to be released and accelerated, in such a manner, in the case of Section 16 Persons, as to conform to the provisions of Rule 16b-3. For avoidance of doubt, the treatment of Awards upon a Change in Control may vary among Participants in the Committee’s sole discretion. Notwithstanding the foregoing, the Committee has the discretion to require that a Participant experience a termination of employment or service before taking any of the actions described in this Section 12.

 

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13.         Adjustment for Changes in Stock Subject to Plan and Other Events. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or Shares of the Company, the Committee shall make such adjustments, if any, as it deems appropriate in the number and kind of Shares subject to the Plan, in the number and kind of Shares covered by outstanding Awards, in the Option price per Share of outstanding Options or the SAR Exercise Price of outstanding SARs, and in the maximum number of Shares that may be issued to any Participant pursuant to Awards made under the Plan. If the adjustment would produce fractional Shares with respect to any then outstanding Awards, the Committee may adjust appropriately the number of Shares covered by the outstanding Awards so as to eliminate the fractional Shares. Any adjustment made under this Section 13 shall be done in a manner that complies with Section 409A of the Code, and any adjustments made with respect to Incentive Stock Options shall comply with Sections 422 and 424 of the Code.

 

14.         Other Terms and Conditions. The Committee may impose such other terms and conditions, not inconsistent with the terms hereof, on the grant, vesting or exercise of Awards or issuance of Shares in connection therewith, as it deems advisable.

 

15.         Effectiveness of Plan. This Plan will be effective upon the approval by a majority of the votes cast by the shareholders of the Company at a meeting of shareholders duly called and held for such purpose within twelve months of adoption of this Plan by the Board. Only Options may be granted prior to such shareholder approval, and such Options may not be exercisable prior to such shareholder approval.

 

16.         Amendment, Modification, and Termination of Plan.

 

(a)          Amendment, Modification and Termination. Unless the Plan shall theretofore have been terminated as hereinafter provided, the Plan shall terminate on, and no Award shall be granted hereunder after the close of business on the next day preceding the tenth anniversary of the date of approval by shareholders as contemplated by Section 15 hereof. The Board may terminate, amend, or modify the Plan in its discretion, and any amendment or modification may be without shareholder approval except to the extent that such approval is required by the Code, pursuant to the rules under Section 16 of the Exchange Act, by any national securities exchange or system on which the Stock is then listed or reported, by any regulatory body having jurisdiction with respect thereto, or under any other applicable laws, rules, or regulations. The Board is specifically authorized to amend the Plan and take such other action as it deems necessary or appropriate to comply with Sections 162(m) and 409A of the Code, or with Rule 16b-3.

 

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(b)          Awards Previously Granted. No termination, amendment, or modification of the Plan, shall adversely affect any Award theretofore granted under the Plan, without the written consent of the Participant.

 

17.         Withholding. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, it shall be a condition to the receipt of such payment or the realization of such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of all such taxes required to be withheld. Unless the Committee otherwise agrees in an Award Agreement or otherwise, a portion of any grant or award shall, at the time that the same becomes taxable to the Participant, be relinquished to the Company to satisfy the Participant’s federal tax withholding requirement. The Fair Market Value of any Shares (determined at the date of withholding) withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined using the applicable minimum statutory tax withholding rates. For the avoidance of doubt, the Participants shall have no legal right to own or receive any Shares withheld from delivery for such purpose, and otherwise shall have no rights in respect of such Shares whether as a shareholder or otherwise. The Company shall have the power and the right to deduct or withhold from any other payments due to a Participant, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant’s FICA obligation) required by law to be withheld with respect to any grant, exercise, or payment under or as a result of this Plan.

 

18.         Successors. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

 

19.         Section 409A of the Code.

 

(a)          Generally. This Plan and any Award granted hereunder is intended to comply with, or be exempt from, the provisions of Section 409A of the Code, and shall be interpreted and administered in a manner consistent with that intention. Each payment under this Agreement is intended to be a “separate payment” and not of a series of payments for purposes of Section 409A.

 

(b)          409A Awards. The provisions of this Section 19 shall apply to any 409A Award or any portion an Award that is or becomes subject to Section 409A of the Code, notwithstanding any provision to the contrary contained in the Plan or the Award Agreement applicable to such Award. 409A Awards include, without limitation:

 

(i)          Any Non-qualified Stock Option or SAR that permits the deferral of compensation other than the deferral of recognition of income until the exercise of the Award; and

 

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(ii)         Any other Award that provides by its terms for settlement of all or any portion of the Award on one or more dates following the Short-Term Deferral Period (as defined below).

 

Subject to any applicable U.S. Treasury Regulations promulgated pursuant to Section 409A of the Code or other applicable guidance, the term “Short-Term Deferral Period” means the period ending on the later of (i) the date that is 2 ½ months from the end of the Company’s fiscal year in which the applicable portion of the Award is no longer subject to a “substantial risk of forfeiture”, or (ii) the date that is 2 ½ months from the end of the Participant’s taxable year in which the applicable portion of the Award is no longer subject to a substantial risk of forfeiture. For this purpose, the term “substantial risk of forfeiture” shall have the meaning set forth in any applicable U.S. Treasury Regulations promulgated pursuant to Section 409A of the Code or other applicable guidance.

 

(c)          Subsequent Elections. Any 409A Award which permits a subsequent election to delay the payment or change the form of payment in settlement of such Award shall comply with the following requirements:

 

(i)          No subsequent election may take effect until at least 12 months after the date on which the subsequent election is made;

 

(ii)         Each subsequent election related to a payment in settlement of an Award (other than upon the Participant’s death or Disability or upon an Unforeseeable Emergency) must result in a delay of the payment for a period of not less than five years from the date such payment would otherwise have been made; and

 

(iii)        No subsequent election related to a payment to be made upon a specified time shall be made less than twelve months prior to the date of the first scheduled installment relating to such payment.

 

(d)          Payments of 409A Awards. No payment in settlement of a 409A Award may commence earlier than:

 

(i)          Separation from Service (as determined pursuant to Treasury Regulations or other applicable guidance);

 

(ii)         The date the Participant becomes Disabled;

 

(iii)        Death;

 

(iv)         A specified time (or pursuant to a fixed schedule) that is either (i) specified by the Committee upon the grant of an Award and set forth in the Award Agreement evidencing such Award, or (ii) specified by the Participant in an Election complying with the requirements of Section 19(c) hereof, as applicable;

 

(v)          To the extent provided by Treasury Regulations promulgated pursuant to Section 409A of the Code or other applicable guidance, a change in the ownership or effective control or the Company or in the ownership of a substantial portion of the assets of the Company; or

 

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(vi)         The occurrence of an “Unforeseeable Emergency” (as defined in Section 409A of the Code).

  

(e)          Six Month Delay. Notwithstanding anything else to the contrary in the Plan, to the extent that a Participant is a “Specified Employee” (as determined in accordance with the requirements of Section 409A of the Code), no payment on account of a Participant’s Separation from Service in settlement of a 409A Award may be made before the date which is six months after such Participant’s date of Separation from Service, or, if earlier, the date of the Participant’s death.

 

(f)          Unforeseeable Emergency. The Committee shall have the authority to provide in the Award Agreement evidencing any 409A Award for payment in settlement of all or a portion of such Award in the event that a Participant establishes, to the satisfaction of the Committee, the occurrence of an Unforeseeable Emergency. In such event, the amount(s) distributed with respect to such Unforeseeable Emergency cannot exceed the amounts necessary to satisfy such Unforeseeable Emergency plus amounts necessary to pay taxes reasonably anticipated as a result of such payment(s), after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). All payments with respect to an Unforeseeable Emergency shall be made in a lump sum as soon as practicable following the Committee’s determination that an Unforeseeable Emergency has occurred. The occurrence of an Unforeseeable Emergency shall be judged and determined by the Committee. The Committee’s decision with respect to whether an Unforeseeable Emergency has occurred and the manner in which, if at all, the payment in settlement of an Award shall be altered or modified, shall be final, conclusive, and not subject to approval or appeal.

 

(g)          No Acceleration of Payments. Notwithstanding anything to the contrary in this Plan, this Plan does not permit the acceleration of the time or schedule of any payment under this Plan in settlement of a 409A Award, except as provided by Section 409A of the Code and/or Treasury Regulations promulgated pursuant to Section 409A of the Code or other applicable guidance.

 

20.         General.

 

(a)          Requirements of Law. The granting of Awards and the issuance of Shares under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies as may be required. No Shares shall be issued or transferred pursuant to this Plan unless and until all legal requirements applicable to such issuance or transfer have, in the opinion of counsel to the Company, been complied with. In connection with any such issuance or transfer, the person acquiring the Shares shall, if requested by the Company, give assurances satisfactory to counsel to the Company in respect to such matters as the Company may deem desirable to assure compliance with all applicable legal requirements.

 

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(b)          Effect of the Plan. The establishment of the Plan shall not confer upon any Participant any legal or equitable right against the Company, its parent, or an Affiliate or the Committee or the Board, except as expressly provided in the Plan. The Plan does not constitute a contract of employment between the Company or any of its Affiliates and any Participant. Participation in the Plan shall not give any Participant any right to be retained in the employment of the Company or any of its Affiliates or to provide service on the Board. No Award and no right under the Plan, contingent or otherwise, shall be subject to any encumbrance, pledge or charge of any nature or shall be assignable except that a beneficiary may be designated in respect to the Award in the event of the death of the holder of the Award and except, also, that if the beneficiary shall be the executor or administrator of the estate of the holder of the Award, any rights in respect to such Award may be transferred to the person or persons or entity (including a trust) entitled thereto under the will of the holder of such Award or under the laws relating to descent and distribution.

 

(c)          Nonexclusivity of the Plan. Neither the adoption of the Plan nor the submission of the Plan to the Company’s shareholders for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of options otherwise than under the Plan.

 

(d)          Not Benefit Plan Compensation. Payments and other benefits received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of Participant’s compensation for purposes of determining the Participant’s benefits under any other benefit plans or arrangements provide by the Company or an Affiliate, except where the Committee expressly provides otherwise in writing.

 

(e)          Parachute Limitations. Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Participant with the Company or any Affiliate, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this paragraph (an “Other Agreement”), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Participant (including groups or classes of Participants or beneficiaries of which the Participant is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Participant (a “Benefit Arrangement”), if the Participant is a “disqualified individual,” as defined in Section 280G(c) of the Code, any Options, SARs, Restricted Stock, Performance Shares, Performance Units or other Awards hereunder held by that Participant and any right to receive any payment or other benefit under this Plan shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Participant under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Participant under this Plan to be considered a “parachute payment” within the meaning of Section 280G(b)(2) of the Code as then in effect (a “Parachute Payment”) and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Participant from the Company under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Participant without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Participant under any Other Agreement or any Benefit Arrangement would cause the Participant to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Participant as described in clause (ii) of the preceding sentence, then the Participant shall have the right, in the Participant’s sole discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Participant under this Plan be deemed to be a Parachute Payment, provided that any such payment or benefit that is excluded from the coverage of Section 409A of the Code shall be reduced or eliminated prior to the reduction or elimination of any benefit that is related to a 409A Award.

 

25
 

 

(f)          Creditors. The interests of any Participant under the Plan or any Award Agreement shall not be subject to the claims of creditors and may not, in any way, be assigned, alienated, or encumbered.

 

(g)          Governing Law. The Plan, and all Award Agreements made pursuant hereto, shall be governed, construed, and administered in accordance with and governed by the laws of the State of Maryland (regardless of the laws that might otherwise govern under applicable principles of conflicts of laws of such jurisdiction or any other jurisdiction).

 

(h)          Section 16 of the Exchange Act. It is the intent of the Company that Awards and transactions permitted by Awards be interpreted in a manner that, in the case of Participants who are or may be subject to Section 16 of the Exchange Act, qualify, to the maximum extent compatible with the express terms of the Awards, for the exemption from liability provided in Rule 16b-3 promulgated under the Exchange Act. The Company shall have no liability to any Participant or other person for Section 16 consequences of Awards or events in connection with Awards if an Award or related event does not so qualify.

 

(i)          Changes in Laws, Rules or Regulations. References in the Plan to any law, rule or regulation shall include a reference to any corresponding rule (or number redesignation) of any amendments or restatements to such law, rule or regulation adopted after the effective date of the Plan’s adoption.

 

(j)          Headings. Headings are given to the sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

 

(k)          Number and Gender. Under the Plan, the singular form of a word shall include the plural form, the masculine gender shall include the feminine gender and similar interpretations shall prevail as the context requires.

 

(l)          Severability. In the event that any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

 

26
 

 

(m)          Other Actions. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including but not by way of limitation, the right of the Company to grant or issue options for proper corporate purposes other than under the Plan with respect to any employee or other person, firm, corporation, or association.

 

(n)          Complete Statement of Plan. This document is a complete statement of the Plan.

 

27



‘ 

EXHIBIT 12.1

 

COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

 

   Year   Year   Year   Year   Year 
   Ended   Ended   Ended   Ended   Ended 
   December 31, 2014   December 31, 2013   December 31, 2012   December 31, 2011   December 31, 2010 
                          
Income From Continuing Operations   18,775,689    18,944,922    14,239,560   $13,736,137   $4,761,768 
Add:                         
Interest on indebtedness   7,636,104    5,739,303    4,552,930    3,678,884    3,215,554 
Amortization of financing costs   950,876    735,424    581,353    277,934    245,444 
                          
Earnings  $27,362,669   $25,419,649   $19,373,843   $17,692,955   $8,222,766 
                          
Fixed charges and preferred stock dividends: Interest on indebtedness and capitalized interest  $7,899,576   $6,306,096   $4,701,984   $3,678,884   $3,534,789 
Amortization of financing costs   950,876    735,424    581,353    277,934    245,444 
                          
Fixed charges   8,850,452    7,041,520    5,283,337    3,956,818    3,780,233 
Add:                         
Preferred stock dividends   -    -    -    -    - 
                          
Combined fixed charges and preferred stock dividends  $8,850,452   $7,041,520   $5,283,337   $3,956,818   $3,780,233 
                          
Ratio of earnings to fixed charges   3.09x   3.61x   3.67x   4.47x   2.18x

 

 



 

Exhibit 21

 

AGREE REALTY CORPORATION

 

SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 2014

 

Subsidary   Jurisdiction of Organization
Agree Limited Partnership   Delaware
Agree – Columbia Crossing Project, LLC   Delaware
Ann Arbor Store No 1, LLC   Delaware
Indianapolis Store No. 16, LLC   Delaware
Boynton Beach Store No. 150, LLC   Delaware
Mt Pleasant Shopping Center LLC   Michigan
Agree Facility No. 1, LLC   Delaware
Agree Bristol & Fenton Project, LLC   Michigan
Agree Realty South-East, LLC   Michigan
Agree Elkhart, LLC   Michigan
Agree Plainfield, LLC   Michigan
Agree Port St. John LLC   Delaware
Agree Charlotte County, LLC   Delaware
Agree Silver Springs Shores, LLC   Delaware
Agree St. Augustine Shores, LLC   Delaware
Agree 103-Middleburg Jacksonville, LLC   Delaware
Agree Brighton, LLC   Delaware
Agree Lowell, LLC   Delaware
Agree Atlantic Beach, LLC   Delaware
Agree Southfield & Webster, LLC   Delaware
Agree Development, LLC   Delaware
Agree Realty Services, LLC   Delaware
Lawrence Store No. 203, L.L.C.   Delaware
Agree Ann Arbor Jackson, LLC   Delaware
Agree Beecher LLC   Michigan
Agree Corunna LLC   Michigan
Agree Construction Management LLC   Delaware
Agree Atchison, LLC   Kansas
Agree Johnstown, LLC   Ohio
Agree Lake in the Hills, LLC   Illinois
NESOR REALTY VENTURES LLC   Florida
Agree Antioch, LLC   Illinois
Agree Concord, LLC   North Carolina
Agree Mansfield, LLC   Connecticut
Agree Tallahassee, LLC   Florida
Agree Spring Grove, LLC   Illinois
Agree Shelby, LLC   Michigan
Agree Wilmington, LLC   North Carolina
Agree Marietta, LLC   Georgia
Agree Boynton, LLC   Florida
Agree Indianapolis, LLC   Indiana
Agree M-59 LLC   Michigan
Agree Dallas Forest Drive, LLC   Texas
Agree Roseville CA, LLC   California
Agree Wawa Baltimore, LLC   Maryland
Agree New Lenox, LLC   Illinois
Agree Chandler, LLC   Arizona
Agree Fort Walton Beach, LLC   Florida
Agree Portland OR LLC   Delaware
Agree Rancho Cordova I   California
Agree Rancho Cordova II   California
Agree Southfield LLC   Michigan
Agree Poinciana LLC   Florida
Agree Venice, LLC   Florida
Agree Madison AL LLC   Alabama
Agree Leawood, LLC   Delaware
Agree Walker, LLC   Michigan

 

 
 

 

Agree 17-92, LLC   Florida
Agree Pinellas Park, LLC   Michigan
Agree Mall of Louisiana, LLC   Louisiana
Agree Cochran GA, LLC   Georgia
Agree Tri-State Lease, LLC   Delaware
Agree Fort Mill SC, LLC   South Carolina
Agree Spartanburg SC LLC   South Carolina
Agree Springfield  IL  LLC   Illinois
Agree Jacksonville NC, LLC   North Carolina
Agree Greenville SC, LLC   South Carolina
ACCP Maryland, LLC   Delaware
Agree – Milestone Center Project, LLC   Delaware
AMCP Germantown, LLC   Delaware
Oklahoma City Store No. 151, LLC   Delaware
Omaha Store No. 166, LLC   Delaware
Phoenix Drive, LLC   Delaware
Agree Morrow GA, LLC   Georgia
Agree Charlotte Poplar, LLC   North Carolina
Agree East Palatka, LLC   Florida
Agree Lyons GA LLC   Georgia
Agree Fuquay Varina LLC   North Carolina
Agree Minneapolis Clinton Ave, LLC   Minnesota
Agree Wichita, LLC   Kansas
Agree 117 Mission, LLC   Michigan
Agree Holdings I, LLC   Delaware
Agree Lake Zurich IL, LLC   Illinois
Agree Ann Arbor State Street, LLC   Michigan
Agree Lebanon VA LLC   Virginia
Agree Harlingen LLC   Texas
Agree Wichita Falls TX LLC   Texas
Agree Pensacola LLC   Florida
Agree Pensacola Nine Mile LLC   Florida
2355 Jackson Avenue, LLC   Michigan
Agree Statham GA, LLC   Georgia
Agree North Las Vegas, LLC   Nevada
Agree St. Joseph MO, LLC   Missouri
Agree Memphis Getwell, LLC   Tennessee
Agree Chicago Kedzie, LLC   Illinois
Agree Sun Valley NV LLC   Nevada
Agree Rapid City SD, LLC   South Dakota
Agree Manchester CT, LLC   Connecticut
Agree Grand Forks LLC   North Dakota
Agree Madisonville TX LLC   Texas
Agree Brooklyn OH LLC   Ohio
Agree Baton Rouge LA LLC   Louisiana
Agree Forest MS LLC   Mississippi
Agree St Petersburg LLC   Florida
Agree Berkeley Solano, LLC   California
Agree Rochester NY LLC   New York
Agree New Lenox 2 LLC   Illinois
Agree Allentown PA LLC   Pennsylvania
Agree Joplin MO LLC   Missouri
Agree Berwyn IL LLC   Illinois
Agree Anderson SC LLC   Delaware
Agree Cannon Station LLC   Delaware
Agree Forest VA LLC   Virginia
Agree Indianapolis Glendale LLC   Delaware
Agree Burlington WA, LLC   Delaware
Agree McKinney TX, LLC   Texas
Agree Littleton CO, LLC   Delaware
Agree Ligonier PA, LLC   Pennsylvania
Agree Montgomeryville PA, LLC   Pennsylvania
Agree Columbia SC, LLC   Delaware
Agree Richmond VA, LLC   Delaware
Agree Asset Services, LLC (LUNACORP, LLC)   Delaware
Agree Center Point Birmingham AL, LLC   Alabama
Agree Montgomery AL, LLC   Alabama
Agree Daniel Morgan Ave Spartanburg, LLC   South Carolina
Agree Magnolia Knoxville TN, LLC   Tennessee
Agree Alcoa TN, LLC   Tennessee
Agree Belton MO, LLC   Missouri
Agree Terre Haute IN, LLC   Delaware
Agree Junction City KS, LLC   Delaware
Agree Novi MI, LLC   Michigan

 

 



 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We have issued our reports dated March 6, 2015 with respect to the consolidated financial statements, financial statement schedule and internal control over financial reporting included in the Annual Report of Agree Realty Corporation on Form 10-K for the year ended December 31, 2014. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Agree Realty Corporation on Forms S-3 (File Nos. 333-201420 and 333-184095) and on Form S-8 (File No. 333-197096).

 

/s/ GRANT THORNTON LLP

 

Southfield, Michigan

March 6, 2015

 

 

 



Exhibit 23.2

  

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

We consent to the incorporation by reference in the Registration Statements on Form S 3 (File No. 333 184095 and 333 201420) and Form S 8 (File No. 333 197096) of Agree Realty Corporation of our report dated March 8, 2013 (March 6, 2015, as to the effects of discontinued operations discussed in Note 9), relating to the consolidated financial statements, which appears on page F 4 of this annual report on Form 10 K for the year ended December 31, 2014.

 

 

/s/ BAKER TILLY VIRCHOW KRAUSE, LLP

 

 

Chicago, Illinois

March 6, 2015

 

 



 

Exhibit 31.1

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Joel N. Agree, certify that:

 

1. I have reviewed this annual report on Form 10-K of Agree Realty Corporation for the year ended December 31, 2014;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: March 6, 2015   /s/ Joel N. Agree
     
    Name:  Joel N. Agree
    Title:    President and Chief Executive Officer

 

 



 

Exhibit 31.2

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Brian R. Dickman, certify that:

 

1. I have reviewed this annual report on Form 10-K of Agree Realty Corporation for the year ended December 31, 2014;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: March 6, 2015   /s/ Brian R. Dickman
     
    Name:  Brian R. Dickman
    Title:    Chief Financial Officer

 

 



 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Based on a review of the Annual Report on Form 10-K for the period ending December 31, 2014 of Agree Realty Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joel N. Agree, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.The Report, containing the financial statements, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Joel N. Agree  
Joel N. Agree  
President and Chief Executive Officer  

 

March 6, 2015

 

 

 



 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Based on a review of the Annual Report on Form 10-K for the period ending December 31, 2014 of Agree Realty Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian R. Dickman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.The Report, containing the financial statements, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Brian R. Dickman  
Brian R. Dickman  
Chief Financial Office  

 

March 6, 2015

 

 
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