NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
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 98.4% interest as of March 31, 2016. 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
Basis
of Accounting and Principles of Consolidation
The
accompanying unaudited consolidated financial statements for the three months ended March 31, 2016 have been prepared in accordance
with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by GAAP for audited financial statements. The unaudited consolidated financial statements reflect all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results for the interim period presented. Operating results
for the three months ended March 31, 2016 may not be indicative of the results that may be expected for the year ending December
31, 2016. Amounts as of December 31, 2015 included in the consolidated financial statements have been derived from the audited
consolidated financial statements as of that date. The unaudited consolidated financial statements, included herein, should be
read in conjunction with the consolidated financial statements and notes thereto, as well as Management's Discussion and Analysis
of Financial Condition and Results of Operations, in our Form 10-K for the year ended December 31, 2015.
The
unaudited consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been 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 at the
date of the financial statements and (2) revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Reclassification
Certain
reclassifications or prior period amounts have been made in the consolidated financial statements and footnotes in order to conform
to the current presentation. As a result of the adoption of ASU 2015-03, unamortized debt issuance cost is presented as a direct
deduction from the carrying amount of the debt liability; in previously filed reports the unamortized debt issuance cost was classified
on the Balance Sheets as an Unamortized Deferred Expense.
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 reporting segments.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Real Estate Investments
The Company records the acquisition of
real estate at cost, including acquisition and closing costs. For properties developed by the Company, all direct and indirect
costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred
during the construction period, are capitalized for financial reporting purposes and recorded as property under development until
construction has been completed. Properties classified as “held for sale” are recorded at the lower of their carrying
value or their fair value less anticipated selling costs.
Accounting for Acquisitions of Real
Estate
The acquisition of property for investment
purposes is typically accounted for as an asset acquisition. The Company allocates the purchase price to land, 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, the Company may use a number of sources, including data provided by independent third parties, as well as information
obtained by the Company as a result of its due diligence, including expected future cash flows of the property and various characteristics
of the markets where the property is located.
In allocating
the fair value of the identified intangible assets and liabilities of an acquired property, in-place lease intangibles are valued
based on the Company’s estimate 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 management’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.
Cash and Cash Equivalents
The Company considers all
highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash
equivalents consist of cash and money market accounts. The account balances periodically exceed the Federal Deposit Insurance
Corporation (“FDIC”) insurance coverage, and as a result, there is a concentration of credit risk related to
amounts on deposit in excess of FDIC insurance coverage. We had $2.7 million and $1.7 million as of March 31, 2016 and
December 31, 2015, respectively, in excess of the FDIC insured limit.
Accounts Receivable – Tenants
The Company reviews its rent receivables
for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history,
the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions
in the area where the property is located. In the event that the collectability of a receivable with respect to any tenant is
in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific rent receivable will
be made. For accrued rental revenues related to the straight-line method of reporting rental revenue, the Company performs a periodic
review of receivable balances to assess the risk of uncollectible amounts and establish appropriate provisions.
Sales Tax
The
Company collects various taxes from tenants and remits these amounts, on a net basis, to the applicable taxing authorities.
Unamortized Deferred Expenses
Deferred expenses include debt financing
costs, 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.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
The following schedule summarizes the
Company’s amortization of deferred expenses for the three months ended March 31, 2016 and 2015, respectively:
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
Credit Facility Financing Costs
|
|
$
|
52,505
|
|
|
$
|
58,779
|
|
Leasing Costs
|
|
|
21,946
|
|
|
|
29,347
|
|
Lease Intangibles
|
|
|
1,685,490
|
|
|
|
953,061
|
|
Total
|
|
$
|
1,759,941
|
|
|
$
|
1,041,187
|
|
The following schedule represents estimated
future amortization of deferred expenses as of March 31, 2016:
Year Ending December 31,
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(remaining)
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility Financing Costs
|
|
$
|
157,515
|
|
|
$
|
210,018
|
|
|
$
|
122,751
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
490,284
|
|
Leasing Costs
|
|
|
65,839
|
|
|
|
87,125
|
|
|
|
84,789
|
|
|
|
82,662
|
|
|
|
62,452
|
|
|
|
299,179
|
|
|
|
682,046
|
|
Lease Intangibles
|
|
|
5,093,241
|
|
|
|
6,725,885
|
|
|
|
6,315,847
|
|
|
|
6,055,325
|
|
|
|
5,920,094
|
|
|
|
46,540,468
|
|
|
|
76,650,860
|
|
Total
|
|
$
|
5,316,595
|
|
|
$
|
7,023,028
|
|
|
$
|
6,523,387
|
|
|
$
|
6,137,987
|
|
|
$
|
5,982,546
|
|
|
$
|
46,839,647
|
|
|
$
|
77,823,190
|
|
Earnings per Share
Earnings
per share have been computed by dividing 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:
|
|
Three Months Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
20,666,806
|
|
|
|
17,595,227
|
|
Less: Unvested restricted stock
|
|
|
(228,077
|
)
|
|
|
(225,395
|
)
|
Weighted average number of common shares outstanding
used in basic earnings per share
|
|
|
20,438,729
|
|
|
|
17,369,832
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in basic earnings per share
|
|
|
20,438,729
|
|
|
|
17,369,832
|
|
Effect of dilutive securities: restricted stock
|
|
|
41,411
|
|
|
|
46,527
|
|
Weighted average number of common shares outstanding
used in diluted earnings per share
|
|
|
20,480,140
|
|
|
|
17,416,359
|
|
Income Taxes
The Company has elected to be taxed as
a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally will not be subject to federal income
tax provided it continues to satisfy certain tests concerning the Company’s sources of income, the nature of its assets,
the amounts distributed to its stockholders, and the ownership of Company stock. Management believes the Company has qualified
and will continue to qualify as a REIT. Notwithstanding the Company’s qualification for taxation as a REIT, the Company
is subject to certain state and local taxes on its income and real estate.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
The Company has established taxable REIT
subsidiaries (“TRS”) pursuant to the provisions of the Internal Revenue Code. The Company’s TRS entities are
able to engage in activities resulting in income that would be non-qualifying income for a REIT. As a result, certain activities
of the Company which occur within its TRS entities are subject to federal and state income taxes. As of March 31, 2016 and December
31, 2015, the Company had accrued a deferred income tax amount of $705,000. In addition, the Company recognized income tax expense
of $0 and $3,317 for the three months ended March 31, 2016 and 2015, respectively.
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 March 2016, the Financial Accounting
Standards Board issued ASU No. 2016-09 “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting.” The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based
payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected
to impact net income, earnings per share, and the statement of cash flows. ASU No. 2016-09 is effective for annual reporting periods
(including interim periods with those periods) beginning after December 15, 2016. Early adoption is permitted. We are still in
the process of determining the impact that the implementation of ASU 2016-09 will have on the Company’s financial statements.
In March 2016, the Financial Accounting
Standards Board issued ASU No. 2016-05 “Derivatives and Hedging (Topic 815): “Effect of Derivative Contract Novations
on Existing Hedge Accounting Relationships”. ASU 2016-05 addresses the impact on hedge accounting due to a change in
a counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. The amendments
in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that
has been designated as a hedging instrument under Topic 815. The amendments in this Update clarify that a change in the counterparty
to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require
dedesignation of that hedging relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14
through 35-18) continue to be met. For public business entities, the amendments in this Update are effective for financial
statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We have
reviewed ASU 2016-05 in the context of our hedge accounting and determined that it has no impact.
In February 2016, the Financial Accounting
Standards Board issued ASU No. 2016-02 “Leases.” The new standard creates Topic 842, Leases, in FASB
Accounting
Standards Codification
(FASB ASC) and supersedes FASB ASC 840,
Leases.
ASU 2016-02 requires a lessee to recognize the
assets and liabilities that arise from leases (operating and finance). However, for leases with a term of 12 months or less, a
lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The main difference
between the existing guidance on accounting for leases and the new standard is that operating leases will now be recorded in the
statement of financial position as assets and liabilities. Current U.S. GAAP requires only capital (finance) leases to be recognized
in the statement of financial position and amounts related to operating leases largely are reflected in the financial statements
as rent expense on the income statement and in disclosures to the financial statements. ASU No. 2016-02 is effective for annual
reporting periods (including interim periods within those periods) beginning after December 15, 2018. Early adoption is permitted.
We are still in the process of determining the impact that the implementation of ASU 2016-02 will have on the Company’s financial
statements.
In April 2015, the Financial Accounting
Standards Board issued ASU No. 2015-03 “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs.” The objective of ASU 2015-03 is to identify, evaluate, and improve areas of GAAP for which cost
and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial
statements. To simplify presentation of debt issuance costs, the amendments require that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent
with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments. ASU
No. 2015-03 is effective for annual reporting periods (including interim periods within those periods) beginning after December
15, 2015. Early adoption is permitted. The Company has adopted the new guidance and determined the resulting impact on the statements
was a reclassification of certain deferred financing costs from other assets to notes payable.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
In May 2014, the Financial Accounting Standards
Board issued ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606). ASU No. 2014-09 was developed to
enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising
from contracts with customers. The update’s core principle is that an entity should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. Companies are to use a five-step contract review model to ensure revenue is recognized,
measured and disclosed in accordance with this principle. ASU 2014-09 was to be effective for fiscal years and interim periods
beginning after December 15, 2016. In August 2015, the Financial Accounting Standards Board issued ASU No. 2015-14 to defer the
effective date of ASU No. 2014-09 for one year. As a result, ASU No. 2014-09 is now effective for fiscal years and interim periods
beginning after December 15, 2017. In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-08 “Revenue
from Contracts with Customers: Principal versus Agent Considerations”. The amendments in this Update do not change the core
principle of the guidance in Topic 606. The amendments clarify the implementation guidance on principal versus agent considerations.
The amendments in this update will be applied retrospectively either to each prior reporting period presented or to disclose the
cumulative effect recognized at the date of initial application. We are still in the process of determining the impact that the
implementation of ASU 2014-09 will have on the Company’s financial statements.
Note 3 – Real
Estate Investments
Real Estate
Portfolio
The Company’s
real estate investments consisted of the following as of March 31, 2016 and December 31, 2015:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Number of Properties
|
|
|
291
|
|
|
|
278
|
|
Gross Leasable Area
|
|
|
5,443,000
|
|
|
|
5,207,000
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
236,700,064
|
|
|
$
|
225,273,640
|
|
Buildings
|
|
|
553,441,081
|
|
|
|
526,911,997
|
|
Property under Development
|
|
|
3,575,090
|
|
|
|
3,663,301
|
|
Gross Real Estate Investments
|
|
$
|
793,716,235
|
|
|
$
|
755,848,938
|
|
|
|
|
|
|
|
|
|
|
Less Accumulated Depreciation
|
|
$
|
(59,763,907
|
)
|
|
$
|
(56,401,423
|
)
|
Net Real Estate Investments
|
|
$
|
733,952,328
|
|
|
$
|
699,447,515
|
|
Lease Intangibles
The following
table details lease intangibles, net of accumulated amortization, as of March 31, 2016 and December 31, 2015:
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Intangible Lease Asset - In-Place Leases
|
|
$
|
49,268,003
|
|
|
$
|
47,051,639
|
|
Less: Accumulated Amortization
|
|
|
(8,149,993
|
)
|
|
|
(7,239,191
|
)
|
Intangible Lease Asset - Above-Market Leases
|
|
|
63,605,600
|
|
|
|
61,241,046
|
|
Less: Accumulated Amortization
|
|
|
(8,678,391
|
)
|
|
|
(7,367,216
|
)
|
Intangible Lease Liability - Below-Market Leases
|
|
|
(23,959,459
|
)
|
|
|
(21,162,576
|
)
|
Less: Accumulated Amortization
|
|
|
4,565,100
|
|
|
|
4,028,614
|
|
Lease Intangible Asset, net
|
|
$
|
76,650,860
|
|
|
$
|
76,552,316
|
|
Investments
During the three
months ended March 31, 2016, the Company purchased 12 retail net lease assets for approximately $33.3 million, including acquisition
and closing costs. These properties are located in nine states and are leased to 13 different tenants operating in nine diverse
retail sectors for a weighted average lease term of approximately 6.9 years. The underwritten weighted average capitalization
rate on the Company’s acquisitions was approximately 7.9%.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
The aggregate first quarter 2016 acquisitions
were allocated $10.4 million to land, $21.1 million to buildings and improvements, and $1.8 million to lease intangibles. The
acquisitions were all cash purchases and there was no contingent consideration associated with these acquisitions.
None of the Company’s acquisitions
during the first three months of 2016 caused any new or existing tenant to comprise 10% or more of its total assets or generate
10% or more of its total annualized base rent at March 31, 2016.
The Company calculates the underwritten
weighted average capitalization rate on its acquisitions 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.
Note 4 –
Debt
In April 2015, FASB issued
ASU 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet
as a direct deduction from the gross carrying amount of that debt liability, consistent with debt discounts. We adopted
ASU 2015-03 effective as of the three months ended March 31, 2016 and appropriately retrospectively applied the guidance to
our Mortgage Notes Payable, Unsecured Term Loans and Senior Unsecured Notes for all periods presented. Unamortized debt
issuance costs of approximately $2.6 million and $2.7 million are now included as of March 31, 2016 and December 31, 2015,
respectively (previously included in Unamortized Deferred Expenses on our Consolidated Balance Sheets.)
As of March 31, 2016, the Company had
total gross indebtedness of $352.3 million including (i) $92.3 million of mortgage notes payable; (ii) $100.0 million of unsecured
term loans; (iii) $100.0 million of senior unsecured notes; and (iv) $60.0 million of borrowings under its Credit Facility.
Mortgage Notes Payable
As of March 31, 2016,
the Company had total gross mortgage indebtedness of $92.3 million which was collateralized by related real estate with an aggregate
net book value of $118.1 million. Including mortgages that have been swapped to a fixed interest rate, the weighted average interest
rate on the Company’s mortgage notes payable was 4.85%.
In
March 2016, the Company prepaid a mortgage note payable with an outstanding balance of $8.6 million. The fully-amortizing loan
carried a 6.56% interest rate and the final monthly payment was due in June 2016.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Mortgages payable consisted of the following:
|
|
(Unaudited)
|
|
|
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Note payable in monthly installments of interest only at 6.56% annum, with a balloon
payment in the amount of $8,580,000 paid on March 11, 2016; collateralized by related real estate and tenants’
leases
|
|
$
|
-
|
|
|
$
|
8,580,000
|
|
|
|
|
|
|
|
|
|
|
Note payable in monthly principal installments of $56,380 plus interest at 170 basis points over
LIBOR, swapped to a fixed rate of 3.62% as of December 31, 2015. 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
|
|
|
20,571,698
|
|
|
|
20,740,838
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
6,202,425
|
|
|
|
6,552,907
|
|
|
|
|
|
|
|
|
|
|
Note payable in monthly installments of $23,004 including interest at 6.24% per annum, with a
balloon payment of $2,766,628 due February 2020; collateralized by related real estate and tenant lease
|
|
|
3,109,049
|
|
|
|
3,128,803
|
|
|
|
|
|
|
|
|
|
|
Note payable in monthly installments of interest only at 3.60% per annum, with a 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 a
balloon payment of $4,034,627 due September 2023; collateralized by related real estate and tenant lease
|
|
|
5,409,882
|
|
|
|
5,448,058
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
8,351,135
|
|
|
|
8,493,762
|
|
|
|
|
|
|
|
|
|
|
Total Principal
|
|
|
92,284,189
|
|
|
|
101,584,368
|
|
Unamortized debt issuance costs
|
|
|
(1,159,562
|
)
|
|
|
(1,225,651
|
)
|
Total
|
|
$
|
91,124,627
|
|
|
$
|
100,358,717
|
|
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Debt Maturities
The
following table presents scheduled principal payments related to our debt as of March 31, 2016:
|
|
Scheduled
|
|
|
Balloon
|
|
|
|
|
|
|
Principal
|
|
|
Payment
|
|
|
Total
|
|
Remainder of 2016
|
|
$
|
2,233,856
|
|
|
$
|
-
|
|
|
$
|
2,233,856
|
|
2017 (1)
|
|
|
2,710,697
|
|
|
|
19,744,758
|
|
|
|
22,455,455
|
|
2018 (2)
|
|
|
2,575,654
|
|
|
|
85,000,000
|
|
|
|
87,575,654
|
|
2019
|
|
|
2,750,823
|
|
|
|
-
|
|
|
|
2,750,823
|
|
2020
|
|
|
1,100,218
|
|
|
|
37,766,951
|
|
|
|
38,867,169
|
|
Thereafter
|
|
|
9,761,232
|
|
|
|
188,640,000
|
|
|
|
198,401,232
|
|
Total
|
|
$
|
21,132,480
|
|
|
$
|
331,151,709
|
|
|
$
|
352,284,189
|
|
|
(1)
|
The
balloon payment is related to a mortgage note that matures in May 2017 and may be extended,
at the Company’s election, for a two-year term to May 2019, subject to certain
conditions.
|
|
(2)
|
The
balloon payment balance includes the balance outstanding under the Credit Facility as
of March 31, 2016. The Credit Facility matures in July 2018 and may be extended for one
year at the Company’s election, subject to certain conditions.
|
Senior Unsecured Notes
The
following table presents the Senior Unsecured Notes balance net of unamortized debt issuance costs as of March 31, 2016 and 2015:
|
|
March 31,2016
|
|
|
|
|
|
|
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
2025 Senior Unsecured Note
|
|
$
|
50,000,000
|
|
|
$
|
50,000,000
|
|
2027 Senior Unsecured Note
|
|
|
50,000,000
|
|
|
|
50,000,000
|
|
Total Principal
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(823,420
|
)
|
|
|
(610,380
|
)
|
Total
|
|
$
|
99,176,580
|
|
|
$
|
99,389,620
|
|
On May 28, 2015, the Company completed
a private placement of $100.0 million principal amount of senior unsecured notes (the “Senior Unsecured Notes”). The
Senior Unsecured Notes were sold in two series, including $50 million of 4.16% notes due May 30, 2025 and $50.0 million of 4.26%
notes due May 30, 2027. The weighted average term of the Senior Unsecured Notes is 11 years and the weighted average interest
rate is 4.21%. Proceeds from the issuance were used to repay borrowings under the Company's Credit Facility and for general corporate
purposes.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Revolving Credit and Term Loan Facility
The
following table presents the Unsecured Term Loans balance net of unamortized debt issuance costs as of March 31, 2016 and 2015:
|
|
March 31, 2016
|
|
|
|
|
|
|
(Unaudited)
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
2020 Term Loan
|
|
$
|
35,000,000
|
|
|
$
|
35,000,000
|
|
2021 Term Loan
|
|
|
65,000,000
|
|
|
|
65,000,000
|
|
Total Principal
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(579,298
|
)
|
|
|
(843,849
|
)
|
Total
|
|
$
|
99,420,702
|
|
|
$
|
99,156,151
|
|
The Company has in place a $250.0 million
senior unsecured revolving credit and term loan facility (the “Revolving Credit and Term Loan Facility”) consisting
of (i) a $150.0 million revolving credit facility (the “Credit Facility”); (ii) a $65.0 million seven-year unsecured
term loan facility (the “2021 Term Loan”); and (iii) a $35.0 million unsecured term loan facility due 2020 (the “2020
Term Loan”).
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 March 31, 2016, $60
million was outstanding under the Credit Facility bearing a weighted average interest rate of approximately 1.6% and $90 million
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,
and the Company entered into interest rate swaps to fix LIBOR at 2.09% until maturity. As of March 31, 2016, $65.0 million was
outstanding under the 2021 Term Loan bearing an all-in interest rate of 3.74%.
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, and the Company entered into interest rate swaps to fix LIBOR at 2.20% until maturity. As of March 31, 2016, $35.0 million
was outstanding under the 2020 Term Loan bearing an all-in interest rate of 3.85%.
The Revolving Credit and Term Loan Facility
contain 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 March 31, 2016.
Note 5 –
Common Stock
On May 6, 2015, the Company implemented
a $100.0 million at-the-market equity program (“ATM program”) by entering into multiple equity distribution agreements
through which the Company may, from time to time, sell shares of common stock. The Company uses the proceeds generated from its
ATM program for general corporate purposes including funding our investment activity, the repayment or refinancing of outstanding
indebtedness, working capital and other general purposes.
During the three months ended March 31,
2016, the Company issued 53,886 shares of common stock under its ATM program at an average price of $38.38, realizing gross proceeds
of approximately $2.1 million. The Company has approximately $57.9 million remaining under the ATM program as of March 31, 2016.
During the year ended December 31, 2015,
the Company issued 1,318,812 of common stock under its ATM program at an average price of $30.31, realizing gross proceeds of
approximately $40 million.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
On March 27, 2015, the Securities and
Exchange Commission declared effective a shelf registration statement previously filed by the Company. The securities covered
by this registration statement, which expires March 27, 2018, cannot exceed $500.0 million in the aggregate and include common
stock, preferred stock, depositary shares and warrants. The Company may periodically offer one or more of these securities in
amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings,
along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering
materials, at the time of any offering.
We completed a follow-on offering of 1,725,000
shares of common stock in December 2015. The offering, which included the full exercise of the overallotment option by the underwriters,
raised net proceeds of approximately $53.0 million 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.
Note 6 – Dividends
and Distribution Payable
On March 1, 2016, the Company declared
a dividend of $0.465 per share for the quarter ended March 31, 2016. The holders of limited partnership interests in the Operating
Partnership (“OP Units”) were entitled to an equal distribution per OP Unit held as of March 31, 2016. The dividends
and distributions payable were recorded as liabilities on the Company's consolidated balance sheet at March 31, 2016. 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 April 15, 2016.
Note 7 –
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, the Company entered into
a forward starting interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest
rates on $22.3 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives
from the counterparty interest on the notional amount based on one-month LIBOR and pays to the counterparty a fixed rate of 1.92%.
This swap effectively converted $22.3 million of variable-rate borrowings to fixed-rate borrowings from July 1, 2013 to May 1,
2019.
In December 2012, the Company entered
into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $25.0
million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty
interest on the notional amount based on one-month LIBOR and pays to the counterparty a fixed rate of 0.89%. This swap effectively
converted $25.0million of variable-rate borrowings to fixed-rate borrowings from December 6, 2012 to April 4, 2018.
In September 2013, the Company entered
into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on
$35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the
counterparty interest on the notional amount based on one-month LIBOR and pays to the counterparty a fixed rate of 2.20%. This
swap effectively converted $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September
29, 2020.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
In July 2014, the Company entered into
interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0
million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty
interest on the notional amount based on one-month LIBOR and pays to the counterparty a fixed rate of 2.09%. This swap effectively
converted $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021.
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) (“OCI”) for the three months ended March 31, 2016 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 three
months ended March 31, 2016, the Company has determined these derivative instruments to be effective hedges.
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 March
31, 2016.
Note 8 –
Discontinued Operations
The Company 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.
There were no properties classified as
discontinued operations for the three months ended March 31, 2016 and 2015.
Note 9 –
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 March 31, 2016.
Liability:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Carrying Value
|
|
Interest rate swaps
|
|
$
|
-
|
|
|
$
|
6,138,222
|
|
|
$
|
-
|
|
|
$
|
6,138,222
|
|
Mortgage notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
94,526,385
|
|
|
$
|
92,284,189
|
|
Unsecured term loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100,008,610
|
|
|
$
|
100,000,000
|
|
Senior unsecured notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
99,685,161
|
|
|
$
|
100,000,000
|
|
Revolving credit facility
|
|
$
|
-
|
|
|
$
|
60,000,000
|
|
|
$
|
-
|
|
|
$
|
60,000,000
|
|
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 rate debt was derived using the present value of future
payments based on estimated current market interest rates. 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 10 – Equity
Incentive Plan
The Company estimates the fair value of
restricted stock grants at the date of grant and amortizes those amounts into expense on a straight line basis or amount vested,
if greater, over the appropriate vesting period.
As of March 31, 2016, there was $6.6 million
of total unrecognized compensation costs related to the outstanding restricted stock, which is expected to be recognized over
a weighted average period of 3.7 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 stock 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.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)
Restricted
stock activity is summarized as follows:
|
|
Shares
Outstanding
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2015
|
|
|
212,943
|
|
|
$
|
29.07
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
|
83,458
|
|
|
$
|
36.65
|
|
Restricted stock vested
|
|
|
(68,324
|
)
|
|
$
|
26.89
|
|
Restricted stock forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at March 31, 2016
|
|
|
228,077
|
|
|
$
|
32.50
|
|
Note 11 – Subsequent
Events
In
connection with the preparation of its financial statements for the three months ended March 31, 2016, the Company has evaluated
events that occurred subsequent to March 31, 2016 through the date on which these financial statements were available to be issued
to determine whether any of these events required disclosure in the financial statements. The Company is not aware of any subsequent
events that would require recognition or disclosure in the financial statements.