NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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.
The Company was founded in 1971 by its current Executive Chairman, Richard Agree, and our common stock was listed on the New York
Stock Exchange (“NYSE”) in 1994.
Our
assets are held by, and all of our operations are conducted through, directly or indirectly, Agree Limited Partnership (the “Operating
Partnership”), of which Agree Realty Corporation is the sole general partner and in which it held a 98.8% interest as of
June 30, 2017. Under the partnership agreement of the Operating Partnership, Agree Realty Corporation, as the sole general partner,
has exclusive responsibility and discretion in the management and control of the Operating Partnership.
The
terms “Agree Realty,” the "Company," “Management,” "we,” “our” or "us"
refer to Agree Realty Corporation and all of its consolidated subsidiaries, including the Operating Partnership.
Note 2 – Summary
of Significant Accounting Policies
Basis
of Accounting and Principles of Consolidation
The
accompanying unaudited consolidated financial statements for the six months ended June 30, 2017 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 six months ended June 30, 2017 may not be indicative of the results that may be expected for the year ending December
31, 2017. Amounts as of December 31, 2016 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, 2016.
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 and the disclosure of contingent assets and liabilities as of the date of the financial
statements, and (2) revenues and expenses during the reporting period. Actual results could differ from those estimates.
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. Prepaid rents are presented on the Balance Sheet as Deferred Revenue; in previously filed reports
prepaid rents were presented in Accounts Payable - Operating. The classification of below-market lease intangibles are presented
net of accumulated amortization as a Liability; in previously filed reports below-market lease intangibles were presented in Unamortized
Deferred Expenses: Lease Intangibles, net with in-place and above-market lease intangibles.
Segment
Reporting
The Company
is primarily in the business of acquiring, developing and managing retail real estate which is considered to be one reporting
segment. The Company has no other reportable segments.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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 our due diligence, including expected future cash flows of the property and various characteristics
of the markets where the property is located.
In allocating the
fair value of the identified intangible assets and liabilities of an acquired property, in-place lease intangibles are valued
based on the Company’s estimates of costs related to tenant acquisition and the carrying costs that would be incurred during
the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute
similar leases at the time of the acquisition.
Above and below market lease intangibles are
recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the
time of acquisition of the real estate and the Company’s estimate of current market lease rates for the property, measured
over a period equal to the remaining non-cancelable term of the lease.
The fair value of identified intangible assets
and liabilities acquired is amortized to depreciation and amortization over the remaining term of the related leases.
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 $3.3 million and $32.4 million in cash as of June 30, 2017 and December 31, 2016, respectively, in excess of the FDIC insured
limit.
Accounts Receivable – Tenants
The Company reviews its rent receivables for
collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the
financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in
the area where the property is located. In the event that the collectability of a receivable with respect to any tenant is in
doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific rent receivable will be
made. For accrued rental revenues related to the straight-line method of reporting rental revenue, the Company performs a periodic
review of receivable balances to assess the risk of uncollectible amounts and establish appropriate provisions.
The Company’s leases provide for reimbursement
from tenants for common area maintenance (“CAM”), insurance, real estate taxes and other operating expenses ("Operating
Cost Reimbursement Revenue"). A portion of our Operating Cost Reimbursement Revenue is estimated each period and is recognized
as revenue in the period the recoverable costs are incurred and accrued. Receivables from Operating Cost Reimbursement Revenue
are included in our Accounts Receivable - Tenants line item in our consolidated balance sheets. The balance of unbilled Operating
Cost Reimbursement Receivable at June 30, 2017 and December 31, 2016 was $1.5 million and $1.1 million, respectively.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
In addition, many of the Company’s leases
contain rent escalations for which we recognize revenue on a straight-line basis over the non-cancelable lease term. This
method results in rental revenue in the early years of a lease being higher than actual cash received, creating a straight-line
rent receivable asset which is included in the Accounts Receivable - Tenants line item in our consolidated balance sheet. The
balance of straight-line rent receivables at June 30, 2017 and December 31, 2016 was $11.2 million and $9.6
million, respectively. To the extent any of the tenants under these leases become unable to pay their contractual cash
rents, the Company may be required to write down the straight-line rent receivable from those tenants, which would reduce operating
income.
Sales Tax
The
Company collects various taxes from tenants and remits these amounts, on a net basis, to the applicable taxing authorities.
Unamortized Deferred Expenses
Deferred expenses include debt financing costs
related to the line of credit, leasing costs and lease intangibles, and are amortized as follows: (i) debt financing costs related
to the line of credit on a straight-line basis to interest expense over the term of the related loan, which approximates the effective
interest method; (ii) leasing costs on a straight-line basis to depreciation and amortization over the term of the related lease
entered into; and (iii) lease intangibles on a straight-line basis to depreciation and amortization over the remaining term
of the related lease acquired.
The following schedule summarizes the Company’s
amortization of deferred expenses for the three and six months ended June 30, 2017 and 2016 (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility Financing Costs
|
|
$
|
104
|
|
|
$
|
53
|
|
|
$
|
202
|
|
|
$
|
105
|
|
Leasing Costs
|
|
|
40
|
|
|
|
24
|
|
|
|
80
|
|
|
|
47
|
|
Lease Intangibles (Asset)
|
|
|
3,890
|
|
|
|
2,808
|
|
|
|
7,330
|
|
|
|
5,063
|
|
Lease Intangibles (Liability)
|
|
|
(1,041
|
)
|
|
|
(781
|
)
|
|
|
(2,053
|
)
|
|
|
(1,351
|
)
|
Total
|
|
$
|
2,993
|
|
|
$
|
2,104
|
|
|
$
|
5,559
|
|
|
$
|
3,864
|
|
The following schedule represents estimated
future amortization of deferred expenses as of June 30, 2017 (in thousands):
Year Ending December 31,
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(remaining)
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility Financing Costs
|
|
$
|
192
|
|
|
$
|
380
|
|
|
$
|
379
|
|
|
$
|
380
|
|
|
$
|
21
|
|
|
$
|
-
|
|
|
$
|
1,352
|
|
Leasing Costs
|
|
|
80
|
|
|
|
179
|
|
|
|
211
|
|
|
|
191
|
|
|
|
175
|
|
|
|
710
|
|
|
|
1,546
|
|
Lease Intangibles (Asset)
|
|
|
8,342
|
|
|
|
16,919
|
|
|
|
16,391
|
|
|
|
16,019
|
|
|
|
15,330
|
|
|
|
99,927
|
|
|
|
172,928
|
|
Lease Intangibles (Liability)
|
|
|
(2,150
|
)
|
|
|
(4,182
|
)
|
|
|
(4,108
|
)
|
|
|
(4,007
|
)
|
|
|
(3,714
|
)
|
|
|
(12,025
|
)
|
|
|
(30,186
|
)
|
Total
|
|
$
|
6,464
|
|
|
$
|
13,296
|
|
|
$
|
12,873
|
|
|
$
|
12,583
|
|
|
$
|
11,812
|
|
|
$
|
88,612
|
|
|
$
|
145,640
|
|
Earnings per Share
Earnings
per share have been computed by dividing the net income after allocation by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing net income by the weighted average common shares and potentially dilutive common
shares outstanding in accordance with the treasury stock method.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
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
|
|
|
Six Months Ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Weighted average number of common shares outstanding
|
|
|
26,619,350
|
|
|
|
22,406,775
|
|
|
|
26,402,377
|
|
|
|
21,536,791
|
|
Less: Unvested restricted stock
|
|
|
(229,647
|
)
|
|
|
(221,250
|
)
|
|
|
(229,647
|
)
|
|
|
(221,250
|
)
|
Weighted average number of common shares outstanding
used in basic earnings per share
|
|
|
26,389,703
|
|
|
|
22,185,525
|
|
|
|
26,172,730
|
|
|
|
21,315,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in basic earnings per share
|
|
|
26,389,703
|
|
|
|
22,185,525
|
|
|
|
26,172,730
|
|
|
|
21,315,541
|
|
Effect of dilutive securities: restricted stock
|
|
|
67,637
|
|
|
|
79,614
|
|
|
|
67,490
|
|
|
|
69,557
|
|
Weighted average number of common shares outstanding
used in diluted earnings per share
|
|
|
26,457,340
|
|
|
|
22,265,139
|
|
|
|
26,240,220
|
|
|
|
21,385,098
|
|
Income
Taxes
(not presented in thousands)
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.
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 June 30, 2017 and December 31, 2016, the
Company had accrued a deferred income tax amount of $705,000. In addition, the Company recognized income tax expense of $834 and
$1,767 for the three months ended June 30, 2017 and 2016, respectively, and $834 and $7,747 for the six months ended June 30, 2017
and 2016, 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 May 2017, the Financial Accounting Standards
Board (”FASB”) issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification
Accounting” (“ASU 2017-09”). The objective of ASU 2017-09 is to provide guidance on determining which changes
to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.
ASU 2017-09 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim
periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company is in the process of
determining the impact that the implementation of ASU 2017-09 will have on the Company’s financial statements.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
In January 2017, the FASB issued ASU No. 2017-01,
“Business Combinations: Clarifying the Definition of a Business” (“ASU 2017-01”). The objective of ASU
2017-01 is to clarify the definition of a business by adding guidance on how entities should evaluate whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting
including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for public business entities for
fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted
for any interim or annual period. The Company has early adopted and the guidance has no material impact on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02
“Leases” (“ASU 2016-02”). The new standard creates Topic 842, Leases, in FASB
Accounting Standards Codification
(FASB ASC) and supersedes FASB ASC 840,
Leases.
ASU 2016-02 requires a lessee to recognize the assets and liabilities
that arise from leases (operating and finance). However, for leases with a term of 12 months or less, a lessee is permitted to
make an accounting policy election 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. GAAP
requires only capital (finance) leases to be recognized in the statement of financial position, and amounts related to operating
leases largely are reflected in the financial statements as rent expense on the income statement and in disclosures to the financial
statements. ASU 2016-02 is effective for annual reporting periods (including interim periods within those periods) beginning after
December 15, 2018. Early adoption is permitted. The Company has engaged a professional services firm to assist in the implementation
of ASU 2016-02. The Company anticipates that its retail leases where it is the lessor will continue to be accounted for as operating
leases under the new standard. Therefore, the Company does not currently anticipate significant changes in the accounting for its
lease revenues. The Company is also the lessee under various land lease arrangements and it will be required to recognize right
of use assets and related lease liabilities on its consolidated balance sheets upon adoption. The Company will continue to evaluate
the impact of adopting the new leases standard on its consolidated statements of income and comprehensive income and consolidated
balance sheets.
In May 2014, with subsequent updates issued in August 2015 and March, April and May 2016, the FASB issued
ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 was developed
to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising
from contracts with customers. The update’s core principle is that an entity should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. Companies are to use a five-step contract review model to ensure revenue is recognized,
measured and disclosed in accordance with this principle. ASU 2014-09, as updated, is effective for fiscal years and interim periods
beginning after December 15, 2017. The Company has engaged a professional services firm to assist in the implementation of ASU
2014-09. The Company is continuing to evaluate the standard; however, we do not expect its adoption to have a significant impact
on the consolidated financial statements, as approximately 90% of total revenues consist of rental income from leasing arrangements,
which is specifically excluded from the standard. In addition, given the nature of its disposition transactions, there should be
no changes in accounting under the new standard.
Note 3 – Real Estate
Investments
Real Estate
Portfolio
As of June 30, 2017,
the Company owned 413 properties, with a total gross leasable area of 7.9 million square feet. Net Real Estate Investments totaled
$1.1 billion as of June 30, 2017. As of December 31, 2016, the Company owned 366 properties, with a total gross leasable area
of 7.0 million square feet. Net Real Estate Investments totaled $950.3 million as of December 31, 2016.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Investments
During the three
months ended June 30, 2017, the Company acquired 36 retail net lease assets for approximately $131.2 million, which includes acquisition
and closing costs. These properties are located in 19 states and are leased to 31 different tenants operating in 18 diverse retail
sectors for a weighted average lease term of approximately 12.7 years.
During the six months
ended June 30, 2017, the Company acquired 47 retail net lease assets for approximately $184.4 million, which includes acquisition
and closing costs. These properties are located in 21 states and are leased to 38 different tenants operating in 20 diverse retail
sectors for a weighted average lease term of approximately 12.1 years.
The aggregate acquisitions for the six months
ended June 30, 2017 were allocated $35.7 million to land, $106.7 million to buildings and improvements, and $42.0 million to lease
intangibles and other assets. 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 six months of 2017 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 June 30, 2017.
Developments
During the second quarter of 2017, construction
continued on three new development and Partner Capital Solutions (“PCS”) projects with anticipated total project costs
of approximately $24.1 million. The projects consist of the Company’s first PCS project with Art Van Furniture in Canton,
Michigan, as well as the Company’s first two development projects with Mister Car Wash in Urbandale, Iowa and Bernalillo,
New Mexico.
For the first six months of 2017, the Company
had seven development or PCS projects completed or under construction. Anticipated total costs for those projects are approximately
$45.9 million and include the following completed or commenced projects:
Tenant
|
|
Location
|
|
Lease
Structure
|
|
Lease
Term
|
|
Actual
or
Anticipated Rent
Commencement
|
|
Status
|
Camping
World
|
|
Tyler,
TX
|
|
Build-to-Suit
|
|
20
Years
|
|
Q1
2017
|
|
Completed
|
Burger
King(1)
|
|
Heber,
UT
|
|
Build-to-Suit
|
|
20
Years
|
|
Q1
2017
|
|
Completed
|
Camping
World
|
|
Georgetown,
KY
|
|
Build-to-Suit
|
|
20
Years
|
|
Q2
2017
|
|
Completed
|
Orchard
Supply
|
|
Boynton
Beach, FL
|
|
Build-to-Suit
|
|
15
Years
|
|
Q3
2017
|
|
Under
Construction
|
Mister
Car Wash
|
|
Urbandale,
IA
|
|
Build-to-Suit
|
|
20
years
|
|
Q4
2017
|
|
Under
Construction
|
Mister
Car Wash
|
|
Bernalillo,
NM
|
|
Build-to-Suit
|
|
20
years
|
|
Q4
2017
|
|
Under
Construction
|
Art
Van Furniture
|
|
Canton,
MI
|
|
Build-to-Suit
|
|
20
years
|
|
Q1
2018
|
|
Under
Construction
|
Notes:
(1) Franchise restaurant operated by Meridian
Restaurants Unlimited, L.C.
Dispositions
During
the three months ended June 30, 2017, the Company sold real estate properties for net proceeds of $11.7 million and a net gain
of $4.8 million (net of any expected losses on real estate held for sale).
During
the six months ended June 30, 2017, the Company sold real estate properties for net proceeds of $21.9 million and a net gain of
$9.5 million (net of any expected losses on real estate held for sale).
Note 4 – Debt
We account for debt issuance costs under 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. Unamortized debt issuance costs
of approximately $2.8 million and $3.1 million are included as an offset to the respective debt balances as of June 30, 2017 and
December 31, 2016.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
As of June 30, 2017, we had total gross indebtedness
of $436.5 million, including (i) $68.8 million of mortgage notes payable; (ii) $159.7 million of unsecured term loans; (iii) $160.0
million of senior unsecured notes; and (iv) $48.0 million of borrowings under our Credit Facility.
Mortgage Notes Payable
As of June 30, 2017, the
Company had total gross mortgage indebtedness of $68.8 million which was collateralized by related real estate with an aggregate
net book value of $89.5 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 3.92%.
Mortgages payable consisted of the following:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
(not presented in thousands)
|
|
(in thousands)
|
|
Note payable in monthly installments of interest only at LIBOR plus 160 basis points, swapped to a fixed rate of 2.49% with a balloon payment due April 4, 2018; 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
|
|
|
4,357
|
|
|
|
5,114
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
3,006
|
|
|
|
3,049
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
5,213
|
|
|
|
5,294
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
7,604
|
|
|
|
7,910
|
|
|
|
|
|
|
|
|
|
|
Total principal
|
|
|
68,820
|
|
|
|
70,007
|
|
Unamortized debt issuance costs
|
|
|
(817
|
)
|
|
|
(940
|
)
|
Total
|
|
$
|
68,003
|
|
|
$
|
69,067
|
|
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Senior Unsecured Notes
The
following table presents the Senior Unsecured Notes balance net of unamortized debt issuance costs as of June 30, 2017, and December
31, 2016 (in thousands):
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
2025 Senior Unsecured Notes
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
2027 Senior Unsecured Notes
|
|
|
50,000
|
|
|
|
50,000
|
|
2028 Senior Unsecured Notes
|
|
|
60,000
|
|
|
|
60,000
|
|
Total Principal
|
|
|
160,000
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(782
|
)
|
|
|
(824
|
)
|
Total
|
|
$
|
159,218
|
|
|
$
|
159,176
|
|
In May 2015, the Company completed a private
placement of $100.0 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50.0
million of 4.16% notes due in May 2025 and $50.0 million of 4.26% notes due in May 2027. The weighted average term of the senior
unsecured notes is 11 years and the weighted average interest rate is 4.21%.
In July 2016, the Company completed a private
placement of $60.0 million principal amount of senior unsecured notes. The senior unsecured notes bear a fixed interest rate of
4.42% per annum and mature in July 2028.
Unsecured Term Loan Facilities
The following table presents the Unsecured
Term Loans balance net of unamortized debt issuance costs as of June 30, 2017 and December 31, 2016 (in thousands):
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
2019 Term Loan
|
|
$
|
19,685
|
|
|
$
|
20,044
|
|
2023 Term Loan
|
|
|
40,000
|
|
|
|
40,000
|
|
2024 Term Loans
|
|
|
100,000
|
|
|
|
100,000
|
|
Total Principal
|
|
|
159,685
|
|
|
|
160,044
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(1,248
|
)
|
|
|
(1,365
|
)
|
Total
|
|
$
|
158,437
|
|
|
$
|
158,679
|
|
Debt Maturities
The
following table presents scheduled principal payments related to our debt as of June 30, 2017 (in thousands):
|
|
Scheduled
|
|
|
Balloon
|
|
|
|
|
|
|
Principal
|
|
|
Payment
|
|
|
Total
|
|
Remainder of 2017
|
|
$
|
1,602
|
|
|
$
|
-
|
|
|
$
|
1,602
|
|
2018
|
|
|
3,337
|
|
|
|
25,000
|
|
|
|
28,337
|
|
2019
|
|
|
2,751
|
|
|
|
18,547
|
|
|
|
21,298
|
|
2020
|
|
|
1,092
|
|
|
|
2,775
|
|
|
|
3,867
|
|
2021 (1)
|
|
|
998
|
|
|
|
48,000
|
|
|
|
48,998
|
|
Thereafter
|
|
|
8,763
|
|
|
|
323,640
|
|
|
|
332,403
|
|
Total
|
|
$
|
18,543
|
|
|
$
|
417,962
|
|
|
$
|
436,505
|
|
|
(1)
|
The
balloon payment balance includes the balance outstanding under the Credit Facility as
of June 30, 2017. The Credit Facility matures in January 2021, with options to extend
the maturity for one year at the Company’s election, subject to certain conditions.
|
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
The amended and restated credit agreement,
described below, extended the maturity dates of the $65.0 million unsecured term loan facility and $35.0 million unsecured term
loan facility (together, the “2024 Term Loan Facilities”) to January 2024. In connection with entering into the amended
and restated credit agreement, the prior notes evidencing the existing $65.0 million unsecured term loan facility and $35.0 million
unsecured term loan facility were canceled and new notes evidencing the 2024 Term Loan Facilities were executed. Borrowings under
the unsecured 2024 Term Loan Facilities bear interest at a variable LIBOR plus 1.65% to 2.35%, depending on the Company's leverage
ratio. The Company utilized existing interest rate swaps to effectively fix the LIBOR rate (Refer to Note 7 – Derivative
Instruments and Hedging Activity).
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 an interest rate swap to fix LIBOR at 1.40% until maturity. As of June 30, 2017, $40.0 million was outstanding under
the 2023 Term Loan, which is subject to an all-in interest rate of 3.05%.
In
August 2016, the Company
entered into a $20.3
million unsecured amortizing term loan that matures in May 2019 (the “2019 Term Loan”). Borrowings under the
2019 Term Loan are priced at LIBOR plus 170 basis points. In order to fix LIBOR on the 2019 Term Loan at 1.92% until maturity,
the Company had an interest rate swap agreement in place, which was assigned by the lender under the Mortgage Note to the 2019
Term Loan lender. As of June 30, 2017, $19.7 million was outstanding under the 2019 Term Loan bearing an all-in interest
rate of 3.62%.
Senior Unsecured Revolving Credit Facility
In December 2016, the Company amended and restated
the credit agreement that governs the Company's senior unsecured revolving credit facility and the Company's unsecured term loan
facility to increase the aggregate borrowing capacity to $350.0 million. The agreement provides for a $250.0 million unsecured
revolving credit facility, a $65.0 million unsecured term loan facility and a $35.0 million unsecured term loan facility (Referenced
above as 2024 Term Loan Facilities). The unsecured revolving credit facility matures in January 2021 with options to extend the
maturity date to January 2022. The 2024 Term Loan Facilities mature in January 2024. The Company has the ability to increase the
aggregate borrowing capacity under the credit agreement up to $500.0 million, subject to lender approval. Borrowings under the
revolving credit facility bear interest at LIBOR plus 1.30% to 1.95%, depending on the Company’s leverage ratio. Additionally,
the Company is required to pay an unused commitment fee at an annual rate of 0.15% or 0.25% of the unused portion of the revolving
credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants,
including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a maximum percentage of secured debt to total asset
value. As of June 30, 2017 and December 31, 2016, the Company had $48.0 million and $14.0 million of outstanding borrowings under
the revolving credit facility, respectively, bearing weighted average interest rates of approximately 2.4% and 1.9%, respectively.
As of June 30, 2017, $202.0 million was available for borrowing under the revolving credit facility and the Company was in compliance
with the credit agreement covenants.
Concurrent with the amendment and restatement
of the Company’s senior unsecured revolving credit facility, conforming changes were made to the 2023 Term Loan and 2019
Term Loan.
Note 5 – Common
Stock
In April 2017, the Company entered into a
new $200.0 million at-the-market equity program (“ATM program”) through which the Company may, from time to time,
sell shares of common stock. The Company uses the proceeds generated from its ATM program for general corporate purposes,
including funding our investment activity, the repayment or refinancing of outstanding indebtedness, working capital and
other general purposes.
During the three months ended June 30, 2017,
the Company issued 2,500 shares of common stock under its ATM program at a weighted average price of $48.59, realizing gross proceeds
of approximately $0.1 million.
During the six months ended June 30, 2017,
the Company issued 2,500 shares of common stock under its ATM program at a weighted average price of $48.59, realizing gross proceeds
of approximately $0.1 million. The Company had approximately $199.9 million remaining under the ATM program as of June 30, 2017.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
In May 2017, the Company filed an automatic
shelf registration statement on Form S-3, registering an unspecified amount and an indeterminant aggregate initial offering price
of common stock, preferred stock, depositary shares and warrants. The Company may periodically offer one or more of these securities
in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings,
along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering
materials, at the time of any offering.
In June 2017, the Company completed a
follow-on offering of 2,415,000 shares of common stock. The offering, which included the full exercise of
the overallotment option by the underwriters, raised net proceeds of approximately $108.2 million after deducting
the underwriting discount.
Note 6 – Dividends
and Distribution Payable
On May 19, 2017, the Company declared a dividend
of $0.505 per share for the quarter ended June 30, 2017. The holders of limited partnership interests in the Operating Partnership
(“OP Units”) were entitled to an equal distribution per OP Unit held as of June 30, 2017. The dividends and distributions
payable were recorded as liabilities on the Company's consolidated balance sheet at June 30, 2017. The dividend has been reflected
as a reduction of stockholders' equity and the distribution has been reflected as a reduction of the limited partners' non-controlling
interest. These amounts were paid on July 14, 2017.
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. For additional information regarding the leveling of our derivatives (Refer
to Note 9 – Fair Value Measurements).
The Company’s objective in using interest
rate derivatives is to manage its exposure to interest rate movements and add stability to interest expense. To accomplish this
objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated
as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed
rate payments over the life of the agreement without exchange of the underlying notional amount.
In April 2012, the Company entered into an
amortizing forward-starting interest rate swap agreement to hedge against changes in future cash flows resulting from changes
in interest rates on $22.3 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company
receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate
of 1.92%. This swap effectively converted $22.3 million of variable-rate borrowings to fixed-rate borrowings from July 1, 2013
to May 1, 2019. As of June 30, 2017, this interest rate swap was valued as a liability of approximately $0.1 million.
In December 2012, the Company entered into
interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $25.0
million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty
interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 0.89%. This swap effectively
converted $25.0 million of variable-rate borrowings to fixed-rate borrowings from December 6, 2012 to April 4, 2018. As of June
30, 2017, this interest rate swap was valued as an asset of approximately $0.1 million.
In September 2013, the Company entered into
an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0
million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty
interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.20%. This swap effectively
converted $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of
June 30, 2017, this interest rate swap was valued as a liability of approximately $0.6 million.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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 1 month LIBOR and pays to the counterparty a fixed rate of 2.09%. This swap effectively converted
$65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of June 30, 2017, this
interest rate swap was valued as a liability of approximately $0.8 million.
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 month LIBOR and pays to the counterparty a fixed rate of 1.40%. This swap effectively converted
$40.0 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023. As of June 30, 2017, this
interest rate swap was valued as an asset of approximately $1.2 million.
Companies are required to recognize all derivative
instruments as either assets or liabilities at fair value on the balance sheet. The Company has designated these derivative instruments
as cash flow hedges. As such, the effective portion of changes in the fair value of the derivatives designated and that qualify
as cash flow hedges is recorded as a component of other comprehensive income (loss). The ineffective portion of the change in
fair value of the derivative instrument is recognized directly in interest expense. For the three and six months ended June 30,
2017 and 2016, the Company has not recorded any hedge ineffectiveness in earnings. Amounts in accumulated other comprehensive
income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s
variable-rate debt. During the next twelve months, the Company estimates that an additional $0.8 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
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
December 31,
|
|
Interest Rate Derivatives
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap
|
|
|
5
|
|
|
|
5
|
|
|
$
|
184,685
|
|
|
$
|
185,044
|
|
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
The table below presents the estimated fair
value of the Company’s derivative financial instruments, as well as their classification in the consolidated balance sheets
(in thousands).
|
|
Asset Derivatives
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Other Assets
|
|
$
|
1,285
|
|
|
Other Assets
|
|
$
|
1,409
|
|
|
|
Liability Derivatives
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Other Liabilities
|
|
$
|
1,539
|
|
|
Other Liabilities
|
|
$
|
1,994
|
|
The table below displays the effect of the
Company’s derivative financial instruments in the consolidated statements of operations and other comprehensive loss for
the three and six months ended June 30, 2017 and 2016 (in thousands).
Derivatives in
Cash Flow
Hedging
Relationships
|
|
Amount of Income/(Loss)
Recognized in
OCI on Derivative
(Effective Portion)
|
|
|
Location of
Income/(Loss)
Reclassifed from
Accumulated
OCI into Income
(Effective Portion)
|
|
Amount of Income/(Loss)
Reclassified
from Accumulated OCI
into Expense (Effective Portion)
|
|
Three months ended June 30
|
|
2017
|
|
|
2016
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(411
|
)
|
|
$
|
(1,677
|
)
|
|
Interest Expense
|
|
$
|
(435
|
)
|
|
$
|
(533
|
)
|
Six months ended June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
330
|
|
|
$
|
(4,613
|
)
|
|
Interest Expense
|
|
$
|
(900
|
)
|
|
$
|
(1,058
|
)
|
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 June 30, 2017, the fair value of derivatives
in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance
risk, was $1.4 million. As of June 30, 2017, the Company has not posted any collateral related to these net liability positions.
If the Company had breached any of these provisions as of June 30, 2017, it could have been required to settle its obligations
under the agreements at their termination value of $1.4 million.
Although the derivative contracts are subject
to master netting arrangements, which serve as credit mitigants to both us and our counterparties under certain situations, we
do not net our derivative fair values or any existing rights or obligations to cash collateral on the consolidated balance sheets.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
The table below presents a gross presentation
of the effects of offsetting and a net presentation of the Company’s derivatives as of June 30, 2017 and December 31, 2016.
The gross amounts of derivative assets or liabilities can be reconciled to the Tabular Disclosure of Fair Values of Derivative
Instruments above, which also provides the location that derivative assets and liabilities are presented on the consolidated balance
sheets (in thousands):
Offsetting
of Derivative Assets
|
As of June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Statement of Financial Position
|
|
|
|
|
|
|
Gross Amounts
of Recognized
Assets
|
|
|
Gross Amounts
Offset in the
Statement
of
Financial
Position
|
|
|
Net Amounts of
Assets
presented
in the
statement of
Financial
Position
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Received
|
|
|
Net Amount
|
|
Derivatives
|
|
$
|
1,285
|
|
|
$
|
-
|
|
|
$
|
1,285
|
|
|
$
|
(83
|
)
|
|
$
|
-
|
|
|
$
|
1,202
|
|
Offsetting
of Derivative Liabilities
|
As of June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Statement of Financial Position
|
|
|
|
|
|
|
Gross Amounts
of Recognized
Liabilities
|
|
|
Gross Amounts
Offset in the
Statement
of
Financial
Position
|
|
|
Net Amounts of
Liabilities
presented
in the
statement of
Financial
Position
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Received
|
|
|
Net Amount
|
|
Derivatives
|
|
$
|
1,539
|
|
|
$
|
-
|
|
|
$
|
1,539
|
|
|
$
|
(83
|
)
|
|
$
|
-
|
|
|
$
|
1,456
|
|
Offsetting
of Derivative Assets
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Statement of Financial Position
|
|
|
|
|
|
|
Gross Amounts
of Recognized
Assets
|
|
|
Gross Amounts
Offset in the
Statement
of
Financial
Position
|
|
|
Net Amounts of
Assets
presented
in the
statement of
Financial
Position
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Received
|
|
|
Net Amount
|
|
Derivatives
|
|
$
|
1,409
|
|
|
$
|
-
|
|
|
$
|
1,409
|
|
|
$
|
(50
|
)
|
|
$
|
-
|
|
|
$
|
1,359
|
|
Offsetting
of Derivative Liabilities
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Statement of Financial Position
|
|
|
|
|
|
|
Gross Amounts
of Recognized
Liabilities
|
|
|
Gross Amounts
Offset in the
Statement
of
Financial
Position
|
|
|
Net Amounts of
Liabilities
presented
in the
statement of
Financial
Position
|
|
|
Financial
Instruments
|
|
|
Cash Collateral
Received
|
|
|
Net Amount
|
|
Derivatives
|
|
$
|
1,994
|
|
|
$
|
-
|
|
|
$
|
1,994
|
|
|
$
|
(50
|
)
|
|
$
|
-
|
|
|
$
|
1,944
|
|
Note 8 – Discontinued
Operations
There were no properties classified as discontinued
operations for the three and six months ended June 30, 2017.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 9 – Fair
Value Measurements
Assets and Liabilities Measured at Fair
Value
The Company accounts for fair values in accordance
with FASB Accounting Standards Codification Topic 820
Fair Value Measurements and Disclosure
(ASC 820). ASC 820 defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC
820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements;
accordingly, the standard does not require any new fair value measurements of reported balances.
ASC 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions
that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions
in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels
1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted)
in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other
than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2
inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for
the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable
at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on
an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of
the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls, is based on the lowest level input that is significant to the fair value
measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment and considers factors specific to the asset or liability.
Derivative Financial Instruments
Currently, the Company uses interest rate
swap agreements to manage its interest rate risk.
The valuation of these instruments is determined using widely
accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis
reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs,
including interest rate curves.
To comply with the provisions of ASC 820,
the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts
for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements,
such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the
majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood
of default by itself and its counterparties. However, as of June 30, 2017, the Company has assessed the significance of
the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the
credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has
determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
The table below presents the Company’s
assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 (in thousands):
|
|
Balance Sheet Location
|
|
Total Fair
Value
|
|
|
Level 2
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Derivative assets - interest rate swaps
|
|
Other assets
|
|
$
|
1,285
|
|
|
$
|
1,285
|
|
Derivative liabilities - interest rate swaps
|
|
Other liabilities
|
|
$
|
1,539
|
|
|
$
|
1,539
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Derivative assets - interest rate swaps
|
|
Other assets
|
|
$
|
1,409
|
|
|
$
|
1,409
|
|
Derivative liabilities - interest rate swaps
|
|
Other liabilities
|
|
$
|
1,994
|
|
|
$
|
1,994
|
|
The carrying values of cash and cash equivalents,
receivables and accounts payable and accrued liabilities are reasonable estimates of their fair values because of the short maturity
of these financial instruments.
The Company estimated the fair value of our
debt based on our incremental borrowing rates for similar types of borrowing arrangements with the same remaining maturity and
on the discounted estimated future cash payments to be made for other debt. The discount rate used to calculate the
fair value of debt approximates current lending rates for loans and assumes the debt is outstanding through maturity. Since
such amounts are estimates that are based on limited available market information for similar transactions, there can be no assurance
that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument.
Fixed rate debt (including variable rate
debt swapped to fixed through derivatives) with carrying values of $385.7 million and $386.9 million as
of June 30, 2017 and December 31, 2016, respectively, had fair values of approximately $401.6
million and $401.4 million, respectively. Variable rate debt’s fair value is estimated to be equal
to the carrying values of $48.0 million and $14.0 million as of June 30,
2017 and December 31, 2016, respectively.
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 June 30, 2017, there was $7.7 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 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.
Restricted
stock activity is summarized as follows:
|
|
Shares
Outstanding
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Unvested restricted stock at December 31, 2016
|
|
|
227,532
|
|
|
$
|
33.02
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
|
75,038
|
|
|
$
|
48.62
|
|
Restricted stock vested
|
|
|
(72,923
|
)
|
|
$
|
30.47
|
|
Restricted stock forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at June 30, 2017
|
|
|
229,647
|
|
|
$
|
38.92
|
|
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)
Note 11 – Subsequent
Events
In
connection with the preparation of its financial statements, the Company has evaluated events that occurred subsequent to June
30, 2017 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.
On July 5, 2017, Matthew M. Partridge voluntarily
submitted his resignation, effective on or around August 4, 2017, from his positions as Executive Vice President, Chief Financial
Officer and Secretary of the Company.
Also on July 5, 2017, the Company appointed
Kenneth R. Howe to serve as the Company’s interim Chief Financial Officer, effective as of the date of Mr. Partridge’s
departure. Mr. Howe served as the Company’s Chief Financial Officer from April 1994 until his retirement from that position
in November 2010; and on an interim basis from August 2015 to January 2016. From November 2010 to August 2015 and since January
2016, Mr. Howe served as the Company’s Director of Tax.
There
were no other reportable subsequent events or transactions.