NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 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 98.6% interest as of September 30, 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 nine months ended September 30, 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 nine months ended September 30, 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 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 of 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 Sheet as an Unamortized Deferred Expense.
Segment
Reporting
We
are primarily in the business of acquiring, developing and managing retail real estate which we consider one reporting
segment. The Company has no other reporting segments.
Real Estate Investments
The Company records the acquisition of real
estate at cost, including acquisition and closing costs. For properties developed by the Company, all direct and indirect costs
related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred
during the construction period, are capitalized for financial reporting purposes and recorded as property under development until
construction has been completed. Properties classified as “held for sale” are recorded at the lower of their carrying
value or their fair value less anticipated selling costs.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Accounting for Acquisitions of Real
Estate
The acquisition of property for investment
purposes is typically accounted for as an asset acquisition. The Company allocates the purchase price to land, buildings and identified
intangible assets and liabilities, based in each case on their relative estimated fair values and without giving rise to goodwill.
Intangible assets and liabilities 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 $10.7 million and $1.7 million in cash as of September 30, 2016 and December 31, 2015, respectively, in excess of the FDIC
insured limit.
Cash Held in Escrows
Escrows include amounts established pursuant
to various agreements for security deposits, property taxes, insurance and other costs. Escrows also include cash held by qualified
intermediaries for possible like-kind exchanges in accordance with Section 1031 of the Internal Revenue Code in connection with
the sales of the Company’s properties.
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.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
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 which approximates the Effective Interest Method; (ii) leasing costs on a straight-line
basis to depreciation and amortization over the term of the related lease entered into; and (iii) lease intangibles on a straight-line
basis to depreciation and amortization over the remaining term of the related lease acquired.
The following schedule summarizes
the Company’s amortization of deferred expenses for the three and nine months ended September 30, 2016 and 2015,
respectively (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility Financing Costs
|
|
$
|
57
|
|
|
$
|
59
|
|
|
$
|
162
|
|
|
$
|
176
|
|
Leasing Costs
|
|
|
38
|
|
|
|
25
|
|
|
|
83
|
|
|
|
74
|
|
Lease Intangibles
|
|
|
2,148
|
|
|
|
1,718
|
|
|
|
5,860
|
|
|
|
3,820
|
|
Total
|
|
$
|
2,243
|
|
|
$
|
1,802
|
|
|
$
|
6,105
|
|
|
$
|
4,070
|
|
The following schedule represents estimated
future amortization of deferred expenses as of September 30, 2016 (in thousands):
Year Ending December 31,
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(remaining)
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility Financing Costs
|
|
$
|
59
|
|
|
$
|
225
|
|
|
$
|
122
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
406
|
|
Leasing Costs
|
|
|
40
|
|
|
|
163
|
|
|
|
161
|
|
|
|
159
|
|
|
|
138
|
|
|
|
568
|
|
|
|
1,229
|
|
Lease Intangibles
|
|
|
2,121
|
|
|
|
8,941
|
|
|
|
8,766
|
|
|
|
8,263
|
|
|
|
7,998
|
|
|
|
66,513
|
|
|
|
102,602
|
|
Total
|
|
$
|
2,220
|
|
|
$
|
9,329
|
|
|
$
|
9,049
|
|
|
$
|
8,422
|
|
|
$
|
8,136
|
|
|
$
|
67,081
|
|
|
$
|
104,237
|
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
Weighted average number of common shares outstanding
|
|
|
23,674,133
|
|
|
|
18,213,436
|
|
|
|
22,254,439
|
|
|
|
17,858,326
|
|
Less: Unvested restricted stock
|
|
|
(220,050
|
)
|
|
|
(204,844
|
)
|
|
|
(220,050
|
)
|
|
|
(204,844
|
)
|
Weighted average number of common shares outstanding used in basic earnings per share
|
|
|
23,454,083
|
|
|
|
18,008,592
|
|
|
|
22,034,389
|
|
|
|
17,653,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in basic earnings per share
|
|
|
23,454,083
|
|
|
|
18,008,592
|
|
|
|
22,034,389
|
|
|
|
17,653,482
|
|
Effect of dilutive securities: restricted stock
|
|
|
109,248
|
|
|
|
55,726
|
|
|
|
92,940
|
|
|
|
62,880
|
|
Weighted average number of common shares outstanding used in diluted earnings per share
|
|
|
23,563,331
|
|
|
|
18,064,318
|
|
|
|
22,127,329
|
|
|
|
17,716,362
|
|
Income Taxes
The Company has elected to be taxed as a REIT
under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). 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
September 30, 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 September 30, 2016 and
December 31, 2015, the Company had accrued a deferred income tax amount of $705,000. In addition, the Company recognized no income
tax expense for the three months ended September 30, 2016 and 2015, respectively, and $7,747 and $25,100 for the nine months ended
September 30, 2016 and 2015, respectively.
Fair
Values of Financial Instruments
The Company’s estimates of the 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 in Level
1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in
markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
|
|
Level 3 –
|
Valuation is generated from model-based techniques
that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of
assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing
models, discounted cash flow models and similar techniques.
|
Recent Accounting Pronouncements
In August 2016, the Financial Accounting
Standards Board issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (a consensus of the Emerging Issues Task Force.” The objective of ASU No. 2016-15 is to provide specific guidance
on eight cash flow classification issues and how to reduce diversity in how certain cash receipts and cash payments are presented
and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics.The amendments in this
update are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within
those fiscal years. We are still in the process of determining the impact that the implementation of ASU 2016-15 will have on the
Company’s financial statements.
In June 2016, the Financial Accounting
Standards Board issued ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurements of Credit Losses
on Financial Instruments.” The objective of ASU No. 2016-13 is to provide financial statement users with more decision-useful
information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting
entity at each reporting date. To achieve this objective, the current incurred impairment methodology in current GAAP is to be
replaced by a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. For public business entities that are U.S. Securities and Exchange Commission
(“SEC”) filers, the amendments in the update are effective for financial statements issued for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal years. We are still in the process of determining the impact that
the implementation of ASU 2016-13 will have on the Company’s financial statements.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
In March 2016, the FASB issued ASU No.
2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends ASC Topic 718, Stock
Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted
for and presented in the financial statements. ASU 2016-09 will allow entities to make an accounting policy election for the impact
of most types of forfeitures on the recognition of expense for share-based payment awards by allowing the forfeitures to be either
estimated, as is currently required, or recognized when they actually occur. If elected, the change to recognize forfeitures when
they occur will be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to retained earnings.
ASU 2016-09 will be effective for the Company at the beginning of fiscal 2017, including interim periods in the year of adoption.
Early adoption is permitted in any interim or annual period. The Company has adopted ASU 2016-09 in the context of how the Company
accounts for stock forfeitures, which is reflected in 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 will have no impact upon adoption.
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. The new standard requires lessors to account
for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating
leases. ASU 2016-02 is expected to impact the Company’s consolidated financial statements as the Company has certain
operating land lease arrangements for which it is the lessee. Current 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 each respective balance sheet debt account.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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.”
In April 2016, the Financial Accounting Standards Board issued ASU No. 2016-10 “Revenue from Contracts with Customers: Identifying
Performance Obligations and Licensing.” In May 2016, the Financial Accounting Standards Board issued ASU No. 2016-12 “Revenue
from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients.” The amendments in these updates do not
change the core principle of the guidance in Topic 606. The amendments only clarify the implementation guidance. We are still in
the process of determining the impact that the implementation of ASU 2016-08, 2014-9, 2016-12, and 2016-10 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 September 30, 2016 and December 31, 2015 (in
thousands, except number of properties):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
Number of Properties
|
|
|
341
|
|
|
|
278
|
|
Gross Leasable Area
|
|
|
6,685
|
|
|
|
5,207
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
295,311
|
|
|
$
|
225,274
|
|
Buildings
|
|
|
662,612
|
|
|
|
526,912
|
|
Property under Development
|
|
|
5,795
|
|
|
|
3,663
|
|
Gross Real Estate Investments
|
|
$
|
963,718
|
|
|
$
|
755,849
|
|
Less Accumulated Depreciation
|
|
$
|
(65,884
|
)
|
|
|
(56,401
|
)
|
Net Real Estate Investments
|
|
$
|
897,834
|
|
|
$
|
699,448
|
|
Lease Intangibles
The following
table details lease intangibles, net of accumulated amortization, as of September 30, 2016 and December 31, 2015 (in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Intangible Lease Asset - In-Place Leases
|
|
$
|
59,602
|
|
|
$
|
47,052
|
|
Less: Accumulated Amortization
|
|
|
(10,667
|
)
|
|
|
(7,239
|
)
|
Intangible Lease Asset - Above-Market Leases
|
|
|
94,968
|
|
|
|
61,241
|
|
Less: Accumulated Amortization
|
|
|
(11,936
|
)
|
|
|
(7,367
|
)
|
Intangible Lease Liability - Below-Market Leases
|
|
|
(35,530
|
)
|
|
|
(21,164
|
)
|
Less: Accumulated Amortization
|
|
|
6,165
|
|
|
|
4,029
|
|
Lease Intangible Asset, net
|
|
$
|
102,602
|
|
|
$
|
76,552
|
|
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Investments
During the three
months ended September 30, 2016, the Company purchased 14 retail net lease assets for approximately $49.5 million, including acquisition
and closing costs. These properties are located in 11 states and are leased to 13 different tenants operating in 11 diverse retail
sectors for a weighted average lease term of approximately 10.6 years. The underwritten weighted average capitalization rate on
the Company’s acquisitions was approximately 8.0%.
During the nine
months ended September 30, 2016, the Company purchased 60 retail net lease assets for approximately $234.0 million, which includes
acquisition and closing costs. These properties are located in 23 states and are leased to 40 different tenants operating in 20
diverse retail sectors for a weighted average lease term of approximately 10.7 years. The underwritten weighted average capitalization
rate on the Company’s acquisitions was approximately 7.8%.
The aggregate acquisitions for the nine
months ended September 30, 2016 were allocated $69.4 million to land, $132.6 million to buildings and improvements, and $32.0 million
to lease intangibles. The acquisitions were all cash purchases and there were no contingent considerations associated with these
acquisitions.
None of the Company’s acquisitions
during the first nine 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 September 30, 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.
Dispositions
During
the three months ended September 30, 2016, the Company sold two assets for net proceeds of $15.0 million; a Walgreens property
in Rancho Cordova, California and a Walgreens property in Macomb, Michigan. The Company recorded a net gain of approximately $4.4
million on the sales.
During
the nine months ended September 30, 2016, the Company sold three assets for net proceeds of $22.1 million, including the two assets
described above, in addition to the sale of a Walgreens in Port St. Johns, Florida. The Company recorded a net gain of approximately
$7.1 million on the sales.
Note 4 – Debt
In April 2015, FASB issued ASU 2015-03,
which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction
from the gross carrying amount of that debt liability, consistent with debt discounts. We adopted ASU 2015-03 effective March 31,
2016, and appropriately applied the guidance retrospectively to our Mortgage Notes Payable, Unsecured Term Loans and Senior Unsecured
Notes for all periods presented. Unamortized debt issuance costs of approximately $2.8 million and $2.7 million are now included
as of September 30, 2016, and December 31, 2015, respectively (previously included in Unamortized Deferred Expenses on our Consolidated
Balance Sheets).
As of September 30, 2016, the Company had
total gross indebtedness of $437.8 million, including (i) $70.6 million of mortgage notes payable; (ii) $160.2 million of unsecured
term loans; (iii) $160.0 million of senior unsecured notes; and (iv) $47.0 million of borrowings under $150.0 million revolving
credit facility (the “Credit Facility”).
Mortgage Notes Payable
As of September 30, 2016,
the Company had total gross mortgage indebtedness of $70.6 million which was collateralized by related real estate with an aggregate
net book value of $90.5 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 4.83%.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
In
August 2016, the Company
prepaid a $20.3 million
amortizing mortgage note (the “Mortgage Note”) due May 2017, secured by 7 properties, that had an interest rate of
LIBOR plus 170 basis points. Concurrently therewith, the Company entered into a $20.3 million unsecured amortizing term loan (the “2019 Term Loan”). Refer to Revolving Credit
and Term Loan Facility section below for further detail.
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
September 30, 2016
(Unaudited)
Mortgages payable consisted of the following
(in thousands):
|
|
September 30, 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 was repaid on March 11, 2016; collateralized by related real estate and
tenants’ leases
|
|
$
|
-
|
|
|
$
|
8,580
|
|
|
|
|
|
|
|
|
|
|
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 balloon payment in the amount of $20,283,000 was repaid on August 19, 2016; collateralized by related real estate and tenants’ leases
|
|
|
-
|
|
|
|
20,741
|
|
|
|
|
|
|
|
|
|
|
Note payable in monthly installments of interest only at LIBOR plus 160 basis points, swapped to a fixed rate of 2.49% with a balloon payment due April 4, 2018; collateralized by related real estate and tenants' leases
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
5,483
|
|
|
|
6,553
|
|
|
|
|
|
|
|
|
|
|
Note payable in monthly installments of $23,004, including interest at 6.24% per annum, with a balloon payment of $2,781,819 due February 2020; collateralized by related real estate and tenant lease
|
|
|
3,070
|
|
|
|
3,129
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
23,640
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
5,334
|
|
|
|
5,448
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
8,059
|
|
|
|
8,493
|
|
|
|
|
|
|
|
|
|
|
Total principal
|
|
|
70,586
|
|
|
|
101,584
|
|
Unamortized debt issuance costs
|
|
|
(992
|
)
|
|
|
(1,193
|
)
|
Total
|
|
$
|
69,594
|
|
|
$
|
100,391
|
|
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Debt Maturities
The
following table presents scheduled principal payments related to our debt as of September 30, 2016 (in thousands):
|
|
Scheduled
|
|
|
Balloon
|
|
|
|
|
|
|
Principal
|
|
|
Payment
|
|
|
Total
|
|
Remainder of 2016
|
|
$
|
758
|
|
|
$
|
-
|
|
|
$
|
758
|
|
2017
|
|
|
3,147
|
|
|
|
-
|
|
|
|
3,147
|
|
2018 (1)
|
|
|
3,337
|
|
|
|
72,000
|
|
|
|
75,337
|
|
2019
|
|
|
3,008
|
|
|
|
18,290
|
|
|
|
21,298
|
|
2020
|
|
|
1,100
|
|
|
|
37,767
|
|
|
|
38,867
|
|
Thereafter
|
|
|
9,761
|
|
|
|
288,640
|
|
|
|
298,401
|
|
Total
|
|
$
|
21,111
|
|
|
$
|
416,697
|
|
|
$
|
437,808
|
|
|
(1)
|
The balloon payment balance includes the balance outstanding
under the Credit Facility as of September 30, 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 September 30, 2016, and
2015 (in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
2025 Senior Unsecured Note
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
2027 Senior Unsecured Note
|
|
|
50,000
|
|
|
|
50,000
|
|
2028 Senior Unsecured Note
|
|
|
60,000
|
|
|
|
-
|
|
Total Principal
|
|
|
160,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(844
|
)
|
|
|
(839
|
)
|
Total
|
|
$
|
159,156
|
|
|
$
|
99,161
|
|
In May 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; $50 million of 4.16% notes due in
May 2025 and $50.0 million of 4.26% notes due in May 2027. The weighted average term of the Senior
Unsecured Notes is 11 years and the weighted average interest rate is 4.21%. Proceeds from the issuance were used to repay
borrowings under the Company's Credit Facility and for general corporate purposes.
In July 2016, the
Company completed a private placement of $60.0 million principal amount of senior unsecured notes (the “2028 Senior
Unsecured Notes”). The Senior Unsecured Notes bear a fixed interest rate of 4.42% per annum and mature in July 2028. 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
September 30, 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 September 30, 2016 and December
31, 2015 (in thousands):
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
2019 Term Loan
|
|
$
|
20,223
|
|
|
$
|
-
|
|
2020 Term Loan
|
|
|
35,000
|
|
|
|
35,000
|
|
2021 Term Loan
|
|
|
65,000
|
|
|
|
65,000
|
|
2023 Term Loan
|
|
|
40,000
|
|
|
|
-
|
|
Total Principal
|
|
|
160,223
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(1,012
|
)
|
|
|
(610
|
)
|
Total
|
|
$
|
159,211
|
|
|
$
|
99,390
|
|
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) the $150.0 million 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 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 September 30, 2016,
$47.0 million was outstanding under the Credit Facility, bearing a weighted average interest rate of approximately 1.87%, and $103.0
million was available for borrowing.
I
n
August 2016, the Company
entered
into a $20.3 million unsecured amortizing term loan that matures in May 2019 (the “2019 Term
Loan”). Borrowings under the 2019 Term Loan are priced at LIBOR plus 170 basis points. In order to fix LIBOR on
the 2019 Term Loan at 1.92% until maturity, the Company had an interest rate swap agreement in place, which was assigned by
the lender under the Mortgage Note to the 2019 Term Loan lender. As of September 30, 2016, $20.2 million was
outstanding under the 2019 Term Loan bearing an all-in interest rate of 3.62%.
The 2020 Term Loan matures in September 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 September 30, 2016, $35.0
million was outstanding under the 2020 Term Loan bearing an all-in interest rate of 3.85%.
The 2021 Term Loan matures in July 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 September 30, 2016, $65.0 million
was outstanding under the 2021 Term Loan bearing an all-in interest rate of 3.74%.
In July 2016, the
Company completed a $40.0 million unsecured term loan facility that matures in July 2023 (the “2023 Term
Loan”). Borrowings under the 2023 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the
Company’s leverage. The Company entered into interest rate swap to fix LIBOR at 1.40% until maturity. As of
September 30, 2016, $40.0 million was outstanding under the 2023 Term Loan, which is subject to an all-in interest rate of
3.05%.
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 September 30, 2016.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Note 5 – Common
Stock
On March 27, 2015, the SEC 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.
On May 6, 2015, the Company implemented
a $100.0 million at-the-market equity program (“ATM”) 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.
We completed a follow-on offering of 2,875,000
shares of common stock in May 2016. The offering, which included the full exercise of the overallotment option by the underwriters,
raised net proceeds of approximately $109.7 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.
During the three months ended September
30, 2016, the Company issued 246,565 shares of common stock under its ATM program at a weighted average price of $49.66, realizing
gross proceeds of approximately $12.2 million.
During the nine months ended September
30, 2016, the Company issued 315,607 shares of common stock under its ATM program at a weighted average price of $47.21, realizing
gross proceeds of approximately $14.9 million. The Company has approximately $45.8 million remaining under the ATM program as of
September 30, 2016.
Note 6 – Dividends
and Distribution Payable
On September 6, 2016, the Company declared
a dividend of $0.48 per share for the quarter ended September 30, 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 September 30, 2016. The dividends
and distributions payable were recorded as liabilities on the Company's consolidated balance sheet at September 30, 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 October 14, 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, through 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 an amortizing forward starting interest rate swap agreement to hedge against changes in future cash flows
resulting from changes in interest rates on $22.3 million in variable-rate borrowings. Under the terms of the interest rate
swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 mo. 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.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
In December 2012, the Company entered into
interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $25.0 million
in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest
on the notional amount based on 1 mo. LIBOR and pays to the counterparty a fixed rate of 0.89%. This swap effectively converted
$25.0 million of variable-rate borrowings to fixed-rate borrowings from December 6, 2012 to April 4, 2018.
In September 2013, the Company entered
into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on
$35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty
interest on the notional amount based on 1 mo. 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.
In July 2014, the Company entered into
interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million
in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest
on the notional amount based on 1 mo. 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.
In June 2016, the Company entered into
an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $40.0
million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty
interest on the notional amount based on 1 mo. LIBOR and pays to the counterparty a fixed rate of 1.40%. This swap effectively converted
$40.0 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023.
Companies are required to recognize all
derivative instruments as either assets or liabilities at fair value on the balance sheet. The Company has designated these derivative
instruments as cash flow hedges. As such, the effective portion of changes in the fair value of the derivatives designated and
that qualify as cash flow hedges is recorded as a component of other comprehensive income (loss). The ineffective portion of the
change in fair value of the derivative instrument is recognized directly in interest expense. For the three and nine months ended
September 30, 2016 and 2015, the Company has not recorded any hedge ineffectiveness in earnings. Amounts in accumulated other comprehensive
income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s
variable-rate debt. During the next twelve months, the Company estimates that an additional $2.0 million will be reclassified as
an increase to interest expense.
The Company had the following outstanding
interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands except number of instruments):
|
|
Number of Instruments
|
|
|
Notional
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
Interest Rate
Derivatives
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap
|
|
|
5
|
|
|
|
4
|
|
|
$
|
185,283
|
|
|
$
|
145,741
|
|
The table below presents the estimated
fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance
sheets (in thousands).
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
|
|
Asset Derivatives
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Other Assets
|
|
$
|
-
|
|
|
Other Assets
|
|
$
|
99
|
|
|
|
Liability Derivatives
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Balance Sheet
Location
|
|
|
Fair Value
|
|
|
Balance Sheet
Location
|
|
|
Fair Value
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
Other
Liabilities
|
|
|
$
|
6,437
|
|
|
|
Other
Liabilities
|
|
|
$
|
3,301
|
|
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 three and nine months ending September 30, 2016 and 2015 (in thousands).
Derivatives in
Cash Flow
Hedging
Relationships
|
|
Amount of Income/(Loss) Recognized
in OCI on Derivative (Effective Portion)
|
|
|
Location of
Income/(Loss)
Reclassifed from
Accumulated OCI
into Income
(Effective Portion)
|
|
Amount of Income/(Loss) Reclassified
from Accumulated OCI into Expense
(Effective Portion)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
2016
|
|
|
2015
|
|
Three months ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1,378
|
|
|
$
|
(2,538
|
)
|
|
Interest Expense
|
|
$
|
(585
|
)
|
|
$
|
(628
|
)
|
Nine months ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(3,236
|
)
|
|
$
|
(2,929
|
)
|
|
Interest Expense
|
|
$
|
(1,779
|
)
|
|
$
|
(2,033
|
)
|
Credit-risk-related Contingent Features
The Company has agreements with two of
its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations
if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.
As of September 30, 2016, the fair value
of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk,
related to these agreements was $6.2 million. As of September 30, 2016, the Company has not posted any collateral related to these.
If the Company had breached any of these provisions as of September 30, 2016, it could have been required to settle its obligations
under the agreements at their termination value of $6.2 million.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Although our derivative contracts are
subject to master netting arrangements, which serve as credit mitigants to both us and our counterparties under certain situations,
we do not net our derivative fair values or any existing rights or obligations to cash collateral on the consolidated balance
sheets.
The table below presents a gross presentation,
the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2016 and December 31,
2015. The gross amounts of derivative assets or liabilities can be reconciled to the Tabular Disclosure of Fair Values of Derivative
Instruments above, which also provides the location that derivative assets and liabilities are presented on the consolidated balance
sheets (in thousands):
Offsetting
of Derivative Assets
|
|
As
of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amounts Not Offset in the
Statement
of Financial Position
|
|
|
|
|
|
|
|
|
Gross
Amounts
of
Recognized
Assets
|
|
|
|
Gross
Amounts
Offset
in the
Statement
of
Financial
Position
|
|
|
|
Net
Amounts of
Assets
presented
in
the statement
of
Financial
Position
|
|
|
|
Financial
Instruments
|
|
|
|
Cash
Collateral
Received
|
|
|
|
Net
Amount
|
|
Derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Offsetting
of Derivative Liabilities
|
|
As
of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Statement of Financial Position
|
|
|
|
|
|
|
Gross Amounts
of Recognized
Liabilities
|
|
|
Gross Amounts
Offset in the
Statement
of
Financial Position
|
|
|
Net Amounts of
Liabilities
presented
in the
statement of
Financial Position
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Received
|
|
|
Net Amount
|
|
Derivatives
|
|
$
|
6,437
|
|
|
$
|
-
|
|
|
$
|
6,437
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,437
|
|
Offsetting
of Derivative Assets
|
|
As
of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Statement of Financial Position
|
|
|
|
|
|
|
Gross Amounts
of Recognized
Assets
|
|
|
Gross Amounts
Offset in the
Statement
of
Financial Position
|
|
|
Net Amounts of
Assets presented
in the statement
of Financial
Position
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Received
|
|
|
Net Amount
|
|
Derivatives
|
|
$
|
99
|
|
|
$
|
-
|
|
|
$
|
99
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
99
|
|
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Offsetting
of Derivative Liabilities
|
|
As
of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Statement of Financial Position
|
|
|
|
|
|
|
Gross Amounts
of Recognized
Liabilities
|
|
|
Gross Amounts
Offset in the
Statement
of
Financial Position
|
|
|
Net Amounts of
Liabilities
presented
in the
statement of
Financial Position
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Received
|
|
|
Net Amount
|
|
Derivatives
|
|
$
|
3,301
|
|
|
$
|
-
|
|
|
$
|
3,301
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,301
|
|
Note 8 –
Discontinued Operations
There were no properties classified as
discontinued operations for the three and nine months ended September 30, 2016 and 2015.
Note 9 –
Fair Value Measurements
Assets and Liabilities Measured at
Fair Value
On January 1, 2008, the Company adopted
FASB Accounting Standards Codification Topic 820
Fair Value Measurements and Disclosure
(ASC 820).
ASC 820 defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC
820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements;
accordingly, the standard does not require any new fair value measurements of reported balances.
ASC 820 emphasizes that fair value is
a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering
market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between
market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs
that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted)
in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other
than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2
inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for
the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable
at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on
an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of
the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls, is based on the lowest level input that is significant to the fair value
measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment and considers factors specific to the asset or liability.
Derivative Financial Instruments
Currently, the Company uses interest rate
swap agreements to manage its interest rate
risk.
The valuation of these instruments is determined using
widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This
analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based
inputs, including interest rate curves.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
To comply with the provisions of ASC 820,
the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts
for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements,
such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that
the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation
adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by itself and its counterparties. However, as of September 30, 2016, the Company has assessed the
significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined
that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the
Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The table below presents the Company’s
assets and liabilities measured at fair value on a recurring basis as of September 30, 2016, aggregated by the level in the fair
value hierarchy within which those measurements fall (in thousands):
|
|
Quoted Prices in
Active Markets for
Identical Assets and
Liabilities (Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Balance at
September 30,
2016
|
|
Asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
-
|
|
|
$
|
6,437
|
|
|
$
|
-
|
|
|
$
|
6,437
|
|
Mortgage notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
73,363
|
|
|
$
|
69,594
|
|
Unsecured term loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
160,915
|
|
|
$
|
159,211
|
|
Senior unsecured notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
159,520
|
|
|
$
|
159,156
|
|
Revolving credit facility
|
|
$
|
-
|
|
|
$
|
47,000
|
|
|
$
|
-
|
|
|
$
|
47,000
|
|
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 September 30, 2016, there was $5.3
million of total unrecognized compensation costs related to the outstanding restricted stock, which is expected to be recognized
over a weighted average period of 3.3 years. The Company used 0% for both the discount factor and forfeiture rate for determining
the fair value of restricted stock.
The holder of a restricted 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
September 30, 2016
(Unaudited)
Restricted
stock activity is summarized as follows (in thousands):
|
|
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
|
|
|
(69,774
|
)
|
|
$
|
26.87
|
|
Restricted stock forfeited
|
|
|
(6,577
|
)
|
|
$
|
35.58
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at September 30, 2016
|
|
|
220,050
|
|
|
$
|
32.43
|
|
Note 11 – Subsequent
Events
In
connection with the preparation of its financial statements, the Company has evaluated events that occurred subsequent to September
30, 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.
There
were no reportable subsequent events or transactions.