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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Mark One

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2020, or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-12928

AGREE REALTY CORPORATION

(Exact name of registrant as specified in its charter)

Maryland

    

38-3148187

State or Other Jurisdiction of Incorporation or

(I.R.S. Employer Identification No.)

Organization

 

70 E. Long Lake Road, Bloomfield Hills, Michigan 48304

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (248) 737-4190

Securities registered pursuant to Section 12(b) of the Act:  

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.0001 par value

ADC

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

No

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

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer 

Smaller reporting company

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

No

As of April 17, 2020, the Registrant had 49,877,109 shares of common stock issued and outstanding.

Table of Contents

AGREE REALTY CORPORATION

Index to Form 10-Q

Page

PART I

Financial Information

Item 1:

Interim Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

1

Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2020 and 2019

3

Condensed Consolidated Statements of Equity for the three months ended March 31, 2020 and 2019

4

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

6

Notes to Condensed Consolidated Financial Statements

7

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

Item 3:

Quantitative and Qualitative Disclosures about Market Risk

43

Item 4:

Controls and Procedures

46

PART II

Item 1:

Legal Proceedings

47

Item 1A:

Risk Factors

47

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3:

Defaults Upon Senior Securities

48

Item 4:

Mine Safety Disclosures

48

Item 5:

Other Information

48

Item 6:

Exhibits

49

SIGNATURES

50

Table of Contents

AGREE REALTY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per-share data)

(Unaudited)

PART I.       FINANCIAL INFORMATION

Item 1.       Financial Statements

March 31, 

December 31, 

2020

2019

ASSETS

Real Estate Investments

  

Land

$

794,616

$

735,991

Buildings

 

1,733,003

 

1,600,293

Less accumulated depreciation

 

(135,376)

 

(127,748)

 

2,392,243

 

2,208,536

Property under development

 

5,372

 

10,056

Net Real Estate Investments

 

2,397,615

 

2,218,592

 

  

Real Estate Held for Sale, net

 

7,795

 

3,750

 

Cash and Cash Equivalents

 

72,091

 

15,603

 

  

Cash Held in Escrows

 

20,049

 

26,554

Accounts Receivable - Tenants

27,747

 

26,808

 

  

Lease intangibles, net of accumulated amortization of

$97,183 and $89,118 at March 31, 2020 and December 31, 2019, respectively

 

354,685

 

343,514

 

Other Assets, net

 

28,963

 

29,709

 

  

Total Assets

$

2,908,945

$

2,664,530

See accompanying notes to condensed consolidated financial statements.

1

Table of Contents

AGREE REALTY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per-share data)

(Unaudited)

March 31, 

December 31, 

2020

2019

LIABILITIES

  

Mortgage Notes Payable, net

$

33,720

$

36,698

  

Unsecured Term Loans, net

237,453

 

237,403

  

Senior Unsecured Notes, net

509,226

 

509,198

  

Unsecured Revolving Credit Facility

242,000

 

89,000

  

Dividends and Distributions Payable

26,859

 

25,014

Accounts Payable, Accrued Expenses, and Other Liabilities

75,334

 

48,987

  

Lease intangibles, net of accumulated amortization of

$20,319 and $19,307 at March 31, 2020 and December 31, 2019, respectively

27,341

 

26,668

  

Total Liabilities

1,151,933

 

972,968

  

EQUITY

  

Common stock, $.0001 par value, 90,000,000 shares

 

authorized, 47,002,109 and 45,573,623 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

5

5

Preferred Stock, $.0001 par value per share, 4,000,000 shares authorized

 

Additional paid-in-capital

1,856,914

 

1,752,912

Dividends in excess of net income

(62,542)

 

(57,094)

Accumulated other comprehensive income (loss)

(39,291)

 

(6,492)

  

Total Equity - Agree Realty Corporation

1,755,086

 

1,689,331

Non-controlling interest

1,926

 

2,231

Total Equity

1,757,012

 

1,691,562

  

Total Liabilities and Equity

$

2,908,945

$

2,664,530

See accompanying notes to condensed consolidated financial statements.

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AGREE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except share and per-share data)

(Unaudited)

Three Months Ended

    

March 31, 2020

    

March 31, 2019

    

Revenues

 

  

 

  

 

Rental Income

$

55,783

$

42,345

Other

 

26

 

3

Total Revenues

 

55,809

 

42,348

 

  

 

  

Operating Expenses

 

  

 

  

Real estate taxes

 

4,702

 

3,622

Property operating expenses

 

2,335

 

1,739

Land lease expense

 

328

 

195

General and administrative

 

4,658

 

4,035

Depreciation and amortization

 

14,132

 

9,864

Provision for impairment

 

 

416

Total Operating Expenses

 

26,155

 

19,871

 

  

 

  

Income from Operations

 

29,654

 

22,477

 

  

 

  

Other (Expense) Income

 

  

 

  

Interest expense, net

 

(9,669)

 

(7,558)

Gain (loss) on sale of assets, net

 

1,645

 

3,427

Income tax (expense) benefit

(260)

170

Net Income

 

21,370

 

18,516

 

  

 

  

Less Net Income Attributable to Non-Controlling Interest

 

141

 

169

 

  

 

  

Net Income Attributable to Agree Realty Corporation

$

21,229

$

18,347

 

  

 

  

Net Income Per Share Attributable to Agree Realty Corporation

 

  

 

  

Basic

$

0.47

$

0.49

Diluted

$

0.46

$

0.48

 

  

 

  

Other Comprehensive Income

 

  

 

  

Net income

$

21,370

$

18,516

Changes in fair value of interest rate swaps

(33,025)

(3,405)

Realized gain (loss) on settlement of interest rate swaps

 

(17)

 

Total Comprehensive Income (Loss)

 

(11,672)

 

15,111

Less Comprehensive Income (Loss) Attributable to Non-Controlling Interest

 

(109)

 

138

 

  

 

  

Comprehensive Income (Loss) Attributable to Agree Realty Corporation

$

(11,563)

$

14,973

 

  

 

  

Weighted Average Number of Common Shares Outstanding - Basic

 

45,436,191

 

37,487,851

 

  

 

  

Weighted Average Number of Common Shares Outstanding - Diluted

 

45,565,054

 

38,320,307

See accompanying notes to condensed consolidated financial statements.

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AGREE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share and per-share data)

(Unaudited)

Accumulated

Dividends in

Other

Common Stock

Additional

excess of net

Comprehensive

Non-Controlling

Total

  

Shares

  

Amount

  

Paid-In Capital

  

income

  

Income (Loss)

  

Interest

  

Equity

Balance, December 31, 2019

45,573,623

$

5

$

1,752,912

$

(57,094)

$

(6,492)

$

2,231

$

1,691,562

Issuance of common stock, net of issuance costs

1,400,251

104,615

104,615

Repurchase of common shares

(20,707)

(1,627)

(1,627)

Issuance of restricted stock under the Omnibus Incentive Plan

48,942

Stock-based compensation

1,014

1,014

Dividends and distributions declared for the period

(26,677)

(203)

(26,880)

Other comprehensive income (loss) - change in fair value and realized gain (loss) on settlement of interest rate swaps

(32,799)

(243)

(33,042)

Net income

21,229

141

21,370

Balance, March 31, 2020

47,002,109

$

5

$

1,856,914

$

(62,542)

$

(39,291)

$

1,926

$

1,757,012

Cash dividends declared per common share:

For the three months ended March 31, 2020

$

0.585

See accompanying notes to condensed consolidated financial statements.

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AGREE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share and per-share data)

(Unaudited)

Accumulated

Dividends in

Other

Common Stock

Additional

excess of net

Comprehensive

Non-Controlling

Total

  

Shares

  

Amount

  

Paid-In Capital

  

income

  

Income (Loss)

  

Interest

  

Equity

Balance, December 31, 2018

37,545,790

$

4

$

1,277,592

$

(42,945)

$

1,424

$

2,411

$

1,238,486

Issuance of common stock, net of issuance costs

874,268

57,845

57,845

Repurchase of common shares

(21,868)

(1,398)

(1,398)

Issuance of restricted stock under the Omnibus Incentive Plan

56,592

Stock-based compensation

913

913

Dividends and distributions declared for the period

(21,342)

(193)

(21,535)

Other comprehensive income (loss) - change in fair value and realized gain (loss) on settlement of interest rate swaps

(3,374)

(31)

(3,405)

Net income

18,347

169

18,516

Balance, March 31, 2019

38,454,782

$

4

$

1,334,952

$

(45,940)

$

(1,950)

$

2,356

$

1,289,422

Cash dividends declared per common share:

For the three months ended March 31, 2019

$

0.555

See accompanying notes to condensed consolidated financial statements.

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AGREE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Three Months Ended

    

March 31, 2020

    

March 31, 2019

Cash Flows from Operating Activities

 

  

 

  

Net income

$

21,370

$

18,516

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation and amortization

 

14,132

 

9,864

Amortization from above (below) market lease intangibles, net

3,809

3,276

Amortization from financing and credit facility costs

 

323

 

325

Stock-based compensation

 

1,014

 

913

Provision for impairment

416

Settlement of interest rate swap

(17)

(Gain) loss on sale of assets

 

(1,645)

 

(3,427)

(Increase) decrease in accounts receivable

 

(1,284)

 

(2,148)

(Increase) decrease in other assets

 

50

 

(1,169)

Increase (decrease) in accounts payable, accrued expenses, and other liabilities

(9,056)

(3,059)

Net Cash Provided by Operating Activities

 

28,696

 

23,507

 

  

 

  

Cash Flows from Investing Activities

 

  

 

  

Acquisition of real estate investments and other assets

 

(229,586)

 

(142,269)

Development of real estate investments and other assets

 

(including capitalized interest of $25 in 2020, $90 in 2019)

 

(1,217)

 

(6,116)

Payment of leasing costs

 

(189)

 

(100)

Net proceeds from sale of assets

 

24,383

 

9,834

Net Cash Used in Investing Activities

 

(206,609)

 

(138,651)

 

  

 

  

Cash Flows from Financing Activities

 

 

  

Proceeds (costs) from common stock offerings, net

 

104,615

 

57,845

Repurchase of common shares

 

(1,627)

 

(1,398)

Unsecured revolving credit facility borrowings (repayments), net

 

153,000

 

52,000

Payments of mortgage notes payable

 

(3,005)

 

(672)

Payments of unsecured term loans

 

 

(190)

Dividends paid

 

(24,811)

 

(20,838)

Distributions to Non-Controlling Interest

 

(203)

 

(193)

Payments for financing costs

 

(73)

 

(36)

Net Cash Provided by Financing Activities

 

227,896

 

86,518

 

  

 

  

Net Increase (Decrease) in Cash and Cash Equivalents

 

49,983

 

(28,626)

Cash and cash equivalents and cash held in escrow, beginning of period

 

42,157

 

53,975

Cash and cash equivalents and cash held in escrow, end of period

$

92,140

$

25,349

 

  

 

  

Supplemental Disclosure of Cash Flow Information

 

  

 

  

Cash paid for interest (net of amounts capitalized)

$

9,669

$

6,902

Cash paid for income tax

$

760

$

646

 

 

  

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

  

 

  

Operating lease right of use assets added upon implementation of leases standard on January 1, 2019

$

$

7,505

Additional operating lease right of use assets added under new ground leases after January 1, 2019

$

$

12,167

Dividends and limited partners’ distributions declared and unpaid

$

26,880

$

21,535

Accrual of development, construction and other real estate investment costs

$

3,034

$

2,629

See accompanying notes to condensed consolidated financial statements.

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AGREE REALTY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

Note 1 – Organization

Agree Realty Corporation (the “Company”), a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. The Company was founded in 1971 by its current Executive Chairman, Richard Agree, and its common stock was listed on the New York Stock Exchange (“NYSE”) in 1994.

The Company’s assets are held by, and all of its operations are conducted through, directly or indirectly, Agree Limited Partnership (the “Operating Partnership”), of which Agree Realty Corporation is the sole general partner and in which it held a 99.3% interest as of March 31, 2020. There is a one-for-one relationship between Operating Partnership units (“Operating Partnership Units”) owned by the Company and Company common shares outstanding.  Under the partnership agreement of the Operating Partnership, the Company, 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,” and “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 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the interim period presented. Operating results for the three months ended March 31, 2020 may not be indicative of the results that may be expected for the year ending December 31, 2020.  Amounts as of December 31, 2019 included in the condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. The unaudited condensed consolidated financial statements, included herein, should be read in conjunction with the audited consolidated financial statements and notes thereto, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s Form 10-K for the year ended December 31, 2019.

The unaudited condensed consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries. The Company, as the sole general partner, held 99.3% and 99.2% of the Operating Partnership as of March 31, 2020 and December 31, 2019, respectively.  All material intercompany accounts and transactions have been eliminated.

At March 31, 2020 and December 31, 2019, the non-controlling interest in the Operating Partnership consisted of a 0.7% and 0.8% ownership interest in the Operating Partnership held by third parties, respectively. The Operating Partnership Units may, under certain circumstances, be exchanged for shares of common stock. The Company as sole general partner of the Operating Partnership has the option to settle exchanged Operating Partnership Units held by others for cash based on the current trading price of our shares. Assuming the exchange of all non-controlling Operating Partnership Units, there would have been 47,349,728 shares of common stock outstanding at March 31, 2020.

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Table of Contents

Significant Risks and Uncertainties

Currently, one of the most significant risks and uncertainties is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19.  A number of our tenants have announced temporary closures of their stores and requested rent deferral or rent abatement during this pandemic.  Many experts predict that the outbreak will trigger, or even has already triggered, a period of global economic slowdown or a global recession.  

The COVID-19 pandemic could have material and adverse effects on our financial condition, results of operations and cash flows in the near term due to, but not limited to, the following:

reduced economic activity severely impacts our tenants' businesses, financial condition and liquidity and may cause tenants to be unable to fully meet their obligations to us or to otherwise seek modifications of such obligations, resulting in increases in uncollectible receivables and reductions in rental income;
the negative financial impact of the pandemic could impact our future compliance with financial covenants of our credit facility and other debt agreements; and
weaker economic conditions could cause us to recognize impairment in value of our tangible or intangible assets.

The extent to which the COVID-19 pandemic impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.

Refer to Note 13 – Subsequent Events for additional information.

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.  

Assets are classified as held for sale based on specific criteria as outlined in ASC 360, Property, Plant & Equipment. Properties classified as “held for sale” are recorded at the lower of their carrying value or their fair value, less anticipated selling costs. Any properties classified as held for sale are not depreciated. Assets are generally classified as held for sale once management has actively engaged in marketing the asset and has received a firm purchase commitment that is expected to close within one year. The Company classified five operating properties as held for sale at March 31, 2020, the assets for which are separately presented in the Condensed Consolidated Balance Sheet.

Real estate held for sale consisted of the following as of March 31, 2020 and December 31, 2019 (in thousands):

    

March 31, 2020

    

December 31, 2019

Land

$

2,405

$

2,269

Building

 

5,288

 

2,315

Lease Intangibles - Asset

 

880

 

 

8,573

 

4,584

Accumulated depreciation and amortization

 

(778)

 

(834)

Total Real Estate Held for Sale, net

$

7,795

$

3,750

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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 estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition.  Above- and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition and the Company’s estimate of current market lease rates for the property.  In the case of sale-leaseback transactions, it is typically assumed that the lease is not in-place prior to the close of the transaction.

Depreciation and Amortization

Land, buildings and improvements are recorded and stated at cost.  The Company’s properties are depreciated using the straight-line method over the estimated remaining useful life of the assets, which are generally 40 years for buildings and 10 to 20 years for improvements. Properties classified as held for sale and properties under development or redevelopment are not depreciated.  Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.

In-place lease intangible assets and the capitalized above- and below-market lease intangibles are amortized over the non-cancelable term of the lease unless the Company believes it is reasonably certain that the tenant will renew the lease for an option term whereby the Company amortizes the value attributable to the renewal over the renewal period.  In-place lease intangible assets are amortized to amortization expense and above- and below-market lease intangibles are amortized as a net reduction of rental income.  In the event of early lease termination, the remaining net book value of any above- or below-market lease intangible is recognized as an adjustment of rental income.

The following schedule summarizes the Company’s amortization of lease intangibles for the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

    

March 31, 2020

    

March 31, 2019

    

Lease Intangibles (In-place)

$

3,508

$

2,052

Lease Intangibles (Above-Market)

 

5,051

 

4,374

Lease Intangibles (Below-Market)

 

(1,242)

 

(1,098)

Total

$

7,317

$

5,328

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The following schedule represents estimated future amortization of lease intangibles as of March 31, 2020 (in thousands):

    

2020

    

Year Ending December 31, 

    

(remaining)

    

2021

    

2022

    

2023

    

2024

    

Thereafter

    

Total

Lease Intangibles (In-place)

$

14,668

  

$

13,406

  

$

12,596

  

$

11,626

  

$

10,378

$

54,804

  

$

117,478

Lease Intangibles (Above-Market)

 

20,623

  

 

20,434

  

 

19,373

  

 

18,482

  

 

16,665

 

141,630

  

 

237,207

Lease Intangibles (Below-Market)

 

(5,226)

 

(4,466)

 

(3,789)

 

(2,874)

 

(2,199)

 

(8,787)

 

(27,341)

Total

$

30,065

  

$

29,374

  

$

28,180

  

$

27,234

  

$

24,844

$

187,647

  

$

327,344

Impairments

The Company reviews real estate investments and related lease intangibles, for possible impairment when certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable though operations plus estimated disposition proceeds. Events or changes in circumstances that may occur include, but are not limited to, significant changes in real estate market conditions, estimated residual values and an expectation to sell assets before the end of the previously estimated life. Impairments are measured to the extent the current book value exceeds the estimated fair value of the asset less disposition costs for any assets classified as held for sale.

The valuation of impaired assets is determined using valuation techniques including discounted cash flow analysis, analysis of recent comparable sales transactions and purchase offers received from third parties, which are Level 3 inputs. The Company may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate.  Estimating future cash flows is highly subjective and estimates can differ materially from actual results.

Cash and Cash Equivalents and Cash Held in Escrows

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. Cash held in escrows relates to delayed like-kind exchange transactions pursued under Section 1031 of the Internal Revenue Code. The account balances of cash and cash held in escrow 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. The Company had $91.1 million and $40.9 million in cash and cash held in escrow as of March 31, 2020 and December 31, 2019, respectively, in excess of the FDIC insured limit.

Revenue Recognition and Accounts Receivable

The Company leases real estate to its tenants under long-term net leases which we account for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Rental increases based upon changes in the consumer price indexes, or other variable factors, are recognized only after changes in such factors have occurred and are then applied according to the lease agreements. Certain leases also provide for additional rent based on tenants’ sales volumes. These rents are recognized when determinable after the tenant exceeds a sales breakpoint.

Recognizing rent escalations on a straight-line 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 Sheets. The balance of straight-line rent receivables at March 31, 2020 and December 31, 2019 was $24.3 million and $23.0 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 rental income.

The Company reviews the collectability of charges under its tenant operating leases 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 collectability with respect to any tenant changes the Company recognizes an adjustment to rental income.

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Table of Contents

The Company’s review of collectability of charges under its operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue.

The Company’s leases provide for reimbursement from tenants for common area maintenance (“CAM”), insurance, real estate taxes and other operating expenses. A portion of the Company’s operating cost reimbursements is estimated each period and is recognized as revenue in the period the recoverable costs are incurred and accrued. Receivables from operating cost reimbursements are included in the Accounts Receivable - Tenants line item in the condensed consolidated balance sheets. The balance of unbilled operating cost reimbursement receivable at March 31, 2020 and December 31, 2019 was $2.0 million and $2.6 million, respectively.

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification  842 Leases (“ASC 842”) using the modified retrospective approach as of January 1, 2019 and elected to apply the transition provisions of the standard at the beginning of the period of adoption.  The Company adopted the practical expedient in ASC 842 that alleviates the requirement to separately present lease and non-lease rental income. As a result, all income earned pursuant to tenant leases is reflected as one line, “Rental Income,” in the condensed consolidated statement of operations.

Sales Tax

The Company collects various taxes from tenants and remits these amounts, on a net basis, to the applicable taxing authorities.

Earnings per Share

Earnings per common share has been computed pursuant to the guidance in the FASB ASC Topic 260, “Earnings Per Share.”  The guidance requires the classification of the Company’s unvested restricted stock, which contain rights to receive non forfeitable dividends, as participating securities requiring the two-class method of computing net income per common share.  In accordance with the two-class method, earnings per share has been computed by dividing the net income less net income attributable to unvested restricted shares by the weighted average number of common shares outstanding less unvested restricted shares. 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.

The following is a reconciliation of the numerator and denominator for the basic net earnings per common share and diluted net earnings per common share computation for each of the periods presented: (in thousands, except for share data)

Three Months Ended

    

    

March 31, 2020

    

March 31, 2019

Net income attributable to Agree Realty Corporation

$

21,229

$

18,347

Less: Income attributable to unvested restricted shares

(81)

(96)

Net income used in basic and diluted earnings per share

$

21,148

$

18,251

Weighted average number of common shares outstanding

  

45,615,400

  

37,688,915

Less: Unvested restricted stock

  

(179,209)

  

(201,064)

Weighted average number of common shares outstanding used in basic earnings per share

  

45,436,191

  

37,487,851

  

  

Weighted average number of common shares outstanding used in basic earnings per share

  

45,436,191

  

37,487,851

Effect of dilutive securities: share-based compensation

  

69,069

  

65,781

Effect of dilutive securities: September 2018 forward equity offering

766,675

Effect of dilutive securities: 2019 ATM forward equity offerings

57,158

Effect of dilutive securities: 2020 ATM forward equity offerings

  

2,636

  

Weighted average number of common shares outstanding used in diluted earnings per share

  

45,565,054

  

38,320,307

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Table of Contents

For the three months ended March 31, 2020, 57,163 shares of common stock included in the 2019 ATM Forward Offerings, 29,418 shares of common stock included in the 2020 ATM Forward Offerings, and 4,719 shares of restricted common stock granted in 2020 were anti-dilutive and were not included in the computation of diluted earnings per share.

Forward Equity Sales

The Company occasionally sells shares of common stock through forward sale agreements to enable the Company to set the price of such shares upon pricing the offering (subject to certain adjustments) while delaying the issuance of such shares and the receipt of the net proceeds by the Company.

To account for the forward sale agreements, the Company considers the accounting guidance governing financial instruments and derivatives.  To date, we have concluded that our forward sale agreements are not liabilities as they do not embody obligations to repurchase our shares nor do they embody obligations to issue a variable number of shares for which the monetary value are predominantly fixed, varying with something other than the fair value of the shares, or varying inversely in relation to our shares. We then evaluate whether the agreements meet the derivatives and hedging guidance scope exception to be accounted for as equity instruments.  We have concluded that the agreements are classifiable as equity contracts based on the following assessments: (i) none of the agreements’ exercise contingencies are based on observable markets or indices besides those related to the market for our own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to our own stock.

The Company also considers the potential dilution resulting from the forward sale agreements on the earnings per share calculations. The Company uses the treasury stock method to determine the dilution resulting from the forward sale agreements during the period of time prior to settlement.

Income Taxes

The Company made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) and related regulations. The Company generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes 100% of its REIT taxable income and meets certain other requirements for qualifying as a REIT. For the periods ending March 31, 2020 and December 31, 2019, the Company believes it has qualified as a REIT. Notwithstanding its qualification for taxation as a REIT, the Company is subject to certain state taxes on its income and real estate.

Earnings and profits that determine the taxability of distributions to shareholders differ from net income reported for financial reporting purposes due to differences in the estimated useful lives and methods used to compute depreciation and the carrying value (basis) of the investments in properties for tax purposes, among other things.

The Company and its taxable REIT subsidiaries (“TRS”) have made a timely TRS election pursuant to the provisions of the REIT Modernization Act. A TRS is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within its TRS entity are subject to federal and state income taxes. All provisions for federal income taxes in the accompanying condensed consolidated financial statements are attributable to the Company’s TRS.

We regularly analyze our various federal and state filing positions and only recognize the income tax effect in our financial statements when certain criteria regarding uncertain income tax positions have been met. We believe that our income tax positions would more likely than not be sustained upon examination by all relevant taxing authorities. Therefore, no provisions for uncertain income tax positions have been recorded in our financial statements.

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

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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.

Management’s Responsibility to Evaluate Our Ability to Continue as a Going Concern

When preparing financial statements for each annual and interim reporting period, management has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.  In making its evaluation, the Company considers, but is not limited to, any risks and/or uncertainties to its results of operations, contractual obligations in the form of near-term debt maturities, dividend requirements, or other factors impacting the Company’s liquidity and capital resources. No conditions or events that raised substantial doubt about the ability to continue as a going concern within one year were identified as of the issuance date of the financial statements contained in this Quarterly Report on Form 10-Q.

Segment Reporting

The Company is primarily in the business of acquiring, developing and managing retail real estate which is considered to be one reportable segment. The Company has no other reportable segments.

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.

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848).” ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation.  The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.  

In August 2018, the FASB issued ASU No. ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). These amendments modify the disclosure requirements in Topic 820 on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty. The Company adopted ASU 2018-13 on January 1, 2020.  However, as the Company did not

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have any Level 3 fair value measurements and/or other circumstances addressed in ASU 2018-13, adoption did not have a material effect on the Company’s financial statements or disclosures.  

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes how entities measure credit losses for most financial assets. This guidance requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses”, which clarified that receivables arising from operating leases are within the scope of the leasing standard (Topic 842), not Topic 326. The Company adopted this new standard on January 1, 2020.  In the event any of the Company’s leases ever were to be classified as sales-type or direct finance leases, it would become subject to the provisions of ASU 2016-13. However, the Company does not currently have any such leases, nor does it have a significant number of other financial instruments subject to the new standard. Therefore, adoption of ASU 2016-13 has not had, and is not currently expected to have, a material effect on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02 “Leases” (“ASU 2016-02”). The new standard creates ASC 842 and supersedes FASB ASC 840, Leases, which the Company adopted on January 1, 2019 along with related interpretations.  The adoption of the new Leases standard ASU 2016-02 generally had, and will have, the following impacts on the Company:

Topic 842 requires a lessee to recognize right of use assets and lease obligation liabilities that arise from leases (operating and finance).  On January 1, 2019, the Company recognized $7.5 million of right of use assets and lease liabilities, within Other Assets and Accounts Payable, Accrued Expenses, and Other Liabilities on the Condensed Consolidated Balance Sheet.  The Company was not required to reassess the classification of existing land leases and therefore these leases continue to be accounted for as operating leases.  In the event the Company modifies existing land leases or enters into new land leases after adoption of the new standard, such leases may be classified as finance leases.  Business activity occurring subsequent to January 1, 2019, including the Company entering into additional operating leases as lessee, has increased the balances of the right to use assets and lease liabilities to $15.9 million and $16.1 million as of March 31, 2020.

Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. Based on its election of practical expedients, the Company’s existing retail leases, where it is the lessor, continue to be accounted for as operating leases under the new standard.  However, Topic 842 changed certain requirements regarding the classification of leases that could result in the Company recognizing certain long-term leases entered into or modified after January 1, 2019 as sales-type leases, as opposed to operating leases.

The Company elected an optional transition method that allows entities to initially apply Topic 842 at the adoption date (January 1, 2019) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  However, the Company ultimately did not have any cumulative-effect adjustment as of the adoption date.

The Company elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease component is classified as an operating lease.  As a result, the Company now presents all rentals and reimbursements from tenants as a single line item Rental Income within the Condensed Consolidated Statement of Income and Comprehensive Income.

Under Topic 842, beginning on January 1, 2019, changes in the probability of collecting tenant rental income results in direct adjustments of rental income and tenant receivables. The Company no longer recognizes any separate specific bad debt provision or allowance for doubtful accounts.

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Note 3 – Leases

Tenant Leases

The Company is primarily focused on the ownership, acquisition, development and management of retail properties leased to industry leading tenants.  As of March 31, 2020, the Company’s portfolio was approximately 99.3% leased and had a weighted average remaining lease term (excluding extension options) of approximately 9.8 years. A significant majority of its properties are leased to national tenants and approximately 59.6% of its annualized base rent was derived from tenants, or parent entities thereof, with an investment grade credit rating from S&P Global Ratings, Moody’s Investors Service, Fitch Ratings or the National Association of Insurance Commissioners.

Substantially all of the Company’s tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and actual property operating expenses incurred, including property taxes, insurance and maintenance. In addition, the Company’s tenants are typically subject to future rent increases based on fixed amounts or increases in the consumer price index and certain leases provide for additional rent calculated as a percentage of the tenants’ gross sales above a specified level.  Certain of the Company’s properties are subject to leases under which it retains responsibility for specific costs and expenses of the property.

The Company’s leases typically provide the tenant one or more multi-year renewal options to extend their leases, subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term.

The Company attempts to maximize the amount it expects to derive from the underlying real estate property following the end of the lease, to the extent it is not extended.  The Company maintains a proactive leasing program that, combined with the quality and locations of its properties, has made its properties attractive to tenants. The Company intends to continue to hold its properties for long-term investment and, accordingly, place a strong emphasis on the quality of construction and an on-going program of regular and preventative maintenance.  However, the residual value of a real estate property is still subject to various market-specific, asset-specific, and tenant-specific risks and characteristics.  As the classification of a lease is dependent on the fair value of its cash flows at lease commencement, the residual value of a property represents a significant assumption in its accounting for tenant leases.

The Company has elected the practical expedient in ASC Topic 842 on not separating non-lease components from associated lease components.  The lease and non-lease components combined as a result of this election largely include tenant rentals and maintenance charges, respectively. The Company applies the accounting requirements of ASC Topic 842 to the combined component.

The following table includes information regarding the Company’s operating leases for which it is the lessor, for the three months ended March 31, 2020 and March 31, 2019. (presented in thousands)

Three Months Ended

    

March 31, 2020

March 31, 2019

Total Lease Payments

$

58,096

$

44,361

Less: Variable Lease Payments

 

6,893

 

5,587

Total Non-Variable Lease Payments

$

51,203

$

38,774

 

2020

Year Ending December 31, 

    

(remaining)

    

2021

    

2022

    

2023

    

2024

    

Thereafter

    

Total

Future Lease Payments

$

156,517

  

$

207,101

  

$

204,054

  

$

199,560

  

$

190,660

$

1,168,190

  

$

2,126,082

Deferred Revenue

As of March 31, 2020, and December 31, 2019, there was $2.1 million and $4.1 million, respectively, in deferred revenues resulting from rents paid in advance.

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Land Lease Obligations

The Company is the lessee under land lease agreements for certain of its properties, all of which qualified as operating leases as of March 31, 2020. The Company’s land leases are net lease agreements and do not include variable lease payments. These leases typically provide multi-year renewal options to extend their term as lessee at the Company’s option. Option periods are included in the calculation of the lease obligation liability only when options are reasonably certain to be exercised.  Land lease expense was $0.3 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively.

In calculating its lease obligations under the ground leases, the Company uses discount rates estimated to be equal to what it would have to pay to borrow on a collateralized basis over a similar term, for an amount equal to the lease payments, in a similar economic environment.

The following tables include information on the Company’s land leases for which it is the lessee, for the three months ended March 31, 2020 and March 31, 2019. (presented in thousands)

Three Months Ended

    

March 31, 2020

    

March 31, 2019

Operating Lease Costs

$

324

$

202

Variable Lease Costs

 

 

Total Non-Variable Lease Costs

$

324

$

202

Supplemental Disclosure

Right-of-use assets obtained in exchange for new operating lease liabilities

$

$

19,672

Right-of-use assets removed in exchange for real property

Right-of-use assets net change

$

$

19,672

Operating cash outflows on operating leases

$

267

$

198

Weighted-average remaining lease term - operating leases (years)

38.2

37.1

Weighted-average discount rate - operating leases

4.13

%

4.13

%

Maturity Analysis of Lease Liabilities (presented in thousands)

 

2020

Year Ending December 31, 

    

(remaining)

    

2021

    

2022

    

2023

    

2024

    

Thereafter

    

Total

Lease Payments

$

802

  

$

1,015

  

$

789

  

$

789

  

$

789

$

30,583

  

$

34,767

Imputed Interest

 

(495)

 

(645)

 

(634)

 

(628)

 

(621)

 

(15,634)

 

(18,657)

Total Lease Liabilities

$

307

  

$

370

  

$

155

  

$

161

  

$

168

$

14,949

  

$

16,110

Note 4 – Real Estate Investments

Real Estate Portfolio

As of March 31, 2020, the Company owned 868 operating properties located in 46 states, with a total gross leasable area (“GLA”) of approximately 16.3 million square feet. Net Real Estate Investments totaled $2.4 billion as of March 31, 2020. As of December 31, 2019, the Company owned 821 operating properties located in 46 states, with a total GLA of approximately 14.6 million square feet. Net Real Estate Investments totaled $2.2 billion as of December 31, 2019.

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Acquisitions

During the three months ended March 31, 2020, the Company purchased 51 retail net lease assets for approximately $227.0 million, which includes acquisition and closing costs. These properties are located in 24 states and are leased for a weighted average lease term of approximately 11.0 years.

The aggregate acquisitions for the three months ended March 31, 2020 were allocated $63.0 million to land, $144.7 million to buildings and improvements, and $19.3 million to lease intangibles. The acquisitions were all cash purchases and there was no material contingent consideration associated with these acquisitions. None of the Company’s acquisitions during the first three months of 2020 caused any new or existing tenant to comprise 10% or more of its total assets or generate 10% or more of its total annualized contractual base rent at March 31, 2020.

Developments

During the three months ended March 31, 2020, the Company completed three developments or Partner Capital Solutions projects. At March 31, 2020 the Company had one such project under construction.

Dispositions

During the three months ended March 31, 2020, the Company sold six properties for net proceeds of $24.4 million and the Company recorded a net gain of $1.6 million.

Provision for Impairment

As a result of our review of Real Estate Investments, the Company recognized no provisions for impairment for the three months ended March 31, 2020 and $0.4 million for the three months ended March 31, 2019, respectively. The estimated fair value of the impaired real estate assets at their time of impairment during the three months ended March 31, 2019 was $0.6 million.

Note 5 – Debt

As of March 31, 2020, the Company had total gross indebtedness of $1.0 billion, including (i) $34.1 million of mortgage notes payable; (ii) $240.0 million of unsecured term loans; (iii) $510.0 million of senior unsecured notes; and (iv) $242.0 million of borrowings under the Company’s Credit Facility.

Mortgage Notes Payable

As of March 31, 2020, the Company had total gross mortgage indebtedness of $34.1 million which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $44.6 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 4.24% as of March 31, 2020 and 4.40% as of December 31, 2019.

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March 31, 2020

    

December 31, 2019

(not presented in thousands)

(in thousands)

Note payable in monthly installments of $23,004, including interest at 6.24% per annum, extinguished in January 2020

 $

 $

2,775

 

 

  

Note payable in monthly installments of interest only at 3.60% per annum, with a balloon payment due January 2023

 

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

 

4,733

 

4,779

 

  

 

  

Note payable in monthly installments of $91,675 including interest at 6.27% per annum, with a final monthly payment due July 2026

 

5,738

 

5,921

 

  

 

  

Total principal

 

34,111

 

37,115

Unamortized debt issuance costs

 

(391)

 

(417)

Total

$

33,720

$

36,698

The mortgage loans encumbering the Company’s properties are generally non-recourse, subject to certain exceptions for which it would be liable for any resulting losses incurred by the lender. These exceptions vary from loan to loan, but generally include fraud or material misrepresentations, misstatements or omissions by the borrower, intentional or grossly negligent conduct by the borrower that harms the property or results in a loss to the lender, filing of a bankruptcy petition by the borrower, either directly or indirectly, and certain environmental liabilities. At March 31, 2020, there were no mortgage loans with partial recourse to us.

The Company had entered into mortgage loans which are secured by multiple properties and contain cross-default and cross-collateralization provisions. Cross-collateralization provisions allow a lender to foreclose on multiple properties in the event that the Company defaults under the loan. Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan.

Unsecured Term Loan Facilities

The following table presents the unsecured term loans balance net of unamortized debt issuance costs as of March 31, 2020 and December 31, 2019 (in thousands):

    

March 31, 2020

    

December 31, 2019

2023 Term Loan

$

40,000

$

40,000

2024 Term Loan Facilities

 

100,000

 

100,000

2026 Term Loan

 

100,000

 

100,000

Total Principal

 

240,000

 

240,000

Unamortized debt issuance costs

 

(2,547)

 

(2,597)

Total

$

237,453

$

237,403

In August 2016, the Company entered into a $20.3 million unsecured amortizing term loan that matured May 2019 (the “2019 Term Loan”). Borrowings under the 2019 Term Loan were 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. Including the swap, the 2019 Term Loan bore an all-in interest rate of 3.62%.  The 2019 Term Loan was repaid upon maturity in May 2019.

In July 2016, the Company completed a $40.0 million unsecured term loan facility that matures July 2023 (the “2023 Term Loan”). Borrowings under the 2023 Term Loan are priced at LIBOR plus 85 to 165 basis points, depending on the Company’s credit rating. The Company entered into an interest rate swap agreement to fix LIBOR at 140 basis points until maturity. As of March 31, 2020, $40.0 million was outstanding under the 2023 Term Loan, which was subject to an all-in interest rate of 2.40%, including the swap.

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The Credit Agreement, described below, extended the maturity dates of the $65.0 million unsecured term loan facility (the “$65 Million Term Loan”) and $35.0 million unsecured term loan facility (the “$35 Million Term Loan,” and together with the $65 Million Term Loan, the “2024 Term Loan Facilities”) to January 2024. In connection with entering into the Credit Agreement, the prior notes evidencing the existing $65 Million Term Loan and $35 Million Term Loan 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 85 to 165 basis points, depending on the Company’s credit rating. The Company utilized existing interest rate swap agreements to effectively fix LIBOR at 213 basis points until September 2020 for the $35 Million Term Loan and July 2021 for the $65 Million Term Loan (refer to Note 9 – Derivative Instruments and Hedging Activity). As of March 31, 2020, $100.0 million was outstanding under the 2024 Term Loan Facilities, bearing an all-in interest rate of 3.13%, including the swaps.

In December 2018, the Company entered into a $100.0 million unsecured term loan facility that matures January 2026 (the “2026 Term Loan”). Borrowings under the 2026 Term Loan are priced at LIBOR plus 145 to 240 basis points, depending on the Company’s credit rating. The Company entered into interest rate swap agreements to fix LIBOR at 266 basis points until maturity. As of March 31, 2020, $100.0 million was outstanding under the 2026 Term Loan, which was subject to an all-in interest rate of 4.26%, including the swap.

Senior Unsecured Notes

The following table presents the senior unsecured notes balance net of unamortized debt issuance costs as of March 31, 2020, and December 31, 2019 (in thousands):

    

March 31, 2020

    

December 31, 2019

2025 Senior Unsecured Notes

$

50,000

$

50,000

2027 Senior Unsecured Notes

 

50,000

 

50,000

2028 Senior Unsecured Notes

 

60,000

 

60,000

2029 Senior Unsecured Notes

 

100,000

 

100,000

2030 Senior Unsecured Notes

 

125,000

 

125,000

2031 Senior Unsecured Notes

 

125,000

125,000

Total Principal

 

510,000

 

510,000

Unamortized debt issuance costs

 

(774)

 

(802)

Total

$

509,226

$

509,198

All of the Senior Unsecured Notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act.

In May 2015, the Company and the Operating Partnership completed a private placement of $100.0 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50.0 million of 4.16% notes due May 2025 (the “2025 Senior Unsecured Notes”) and $50.0 million of 4.26% notes due May 2027 (the “2027 Senior Unsecured Notes”).

In July 2016, the Company and the Operating Partnership entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $60.0 million aggregate principal amount of 4.42% senior unsecured notes due July 2028 (the “2028 Senior Unsecured Notes”).

In September 2017, the Company and the Operating Partnership completed a private placement of $100.0 million aggregate principal amount of 4.19% senior unsecured notes due September 2029 (the “2029 Senior Unsecured Notes”).

In September 2018, the Company and the Operating Partnership entered into two supplements to uncommitted master note facilities with institutional purchasers. Pursuant to the supplements, the Operating Partnership completed a private placement of $125.0 million aggregate principal amount of 4.32% senior unsecured notes due September 2030 (the “2030 Senior Unsecured Notes”). 

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In October 2019, the Company and the Operating Partnership closed on a private placement of $125.0 million of 4.47% senior unsecured notes due October 2031 (the “2031 Senior Unsecured Notes”).  In March 2019, the Company entered into forward-starting interest rate swap agreements to fix the interest for $100.0 million of long-term debt until maturity. The Company terminated the swap agreements at the time of pricing the 2031 Senior Unsecured Notes, which resulted in an effective annual fixed rate of 4.41% for $100.0 million aggregate principal amount of the 2031 Senior Unsecured Notes. Considering the effect of the terminated swap agreements, the blended all-in rate to the Company for the $125.0 million aggregate principal amount of 2031 Senior Unsecured Notes is 4.42%.

Senior Unsecured Revolving Credit Facility

In December 2019, the Company entered into a Second Amended and Restated Revolving Credit and Term Loan Agreement (the “Credit Agreement”). The Credit Agreement provides for a $500.0 million unsecured revolving credit facility (the “Revolving Credit Facility”), a $65 Million Term Loan and a $35 Million Term Loan. The Credit Agreement amended and restated in its entirety the Company’s previous amended and restated credit agreement dated December 15, 2016.

The Credit Agreement provides $600.0 million unsecured borrowing capacity, composed of the Revolving Credit Facility, which matures on January 15, 2024, as well as the 2024 Term Loan Facilities, which mature on January 15, 2024. Subject to certain terms and conditions set forth in the Credit Agreement, the Company (i) may request additional lender commitments under any or all facilities of up to an additional aggregate of $500.0 million and (ii) may elect, for an additional fee, to extend the maturity date of the Revolving Credit Facility by six months up to two times, for a maximum maturity date of January 15, 2025. No amortization payments are required under the Credit Agreement, and interest is payable in arrears no less frequently than quarterly.

All borrowings under the Revolving Credit Facility (except for swing line loans) bear interest at a rate per annum equal to, at the option of the Company, (i) LIBOR plus a margin that is based upon the Company’s credit rating, or (ii) the Base Rate (which is defined as the greater of the rate of interest as publicly announced from time to time by PNC Bank, National Association, as its prime rate, the Federal Funds Open Rate plus 0.50%, or the Daily Eurodollar Rate plus 1.0%) plus a margin that is based upon the Company’s credit rating. The margins for the Revolving Credit Facility range in amount from 0.775% to 1.450% for LIBOR-based loans and 0.00% to 0.45% for Base Rate loans, depending on the Company’s credit rating. The margins for the Revolving Credit Facility are subject to improvement based on the Company’s leverage ratio, provided its credit rating meets a certain threshold.

Concurrent with entering into the Credit Agreement, certain conforming changes, including customary financial covenants, were made to the 2023 Term Loan and 2026 Term Loan.

The Company and Richard Agree, the Executive Chairman of the Company, are parties to a Reimbursement Agreement dated November 18, 2014. Pursuant to the Reimbursement Agreement, Mr. Agree has agreed to reimburse the Company for any loss incurred under the Revolving Credit Facility in an amount not to exceed $14.0 million to the extent that the value of the Operating Partnership’s assets available to satisfy the Operating Partnership’s obligations under the revolving credit facility is less than $14.0 million.

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Debt Maturities

The following table presents scheduled principal payments related to the Company’s debt as of March 31, 2020 (in thousands):

Scheduled

    

Balloon

    

Principal

Payment

Total

Remainder of 2020

$

711

$

$

711

2021

 

998

 

 

998

2022

 

1,060

 

 

1,060

2023

 

1,069

 

67,656

 

68,725

2024 (1)

963

342,000

342,963

Thereafter

 

1,654

 

610,000

 

611,654

Total

$

6,455

$

1,019,656

$

1,026,111

(1)

The balloon payment balance includes the balance outstanding under the Revolving Credit Facility as of March 31, 2020. The Credit Facility matures in January 2024, with options to extend the maturity as described under Senior Unsecured Revolving Credit Facility above.

Loan Covenants

Certain loan agreements contain various restrictive covenants, including the following financial covenants: maximum total leverage ratio, maximum secured leverage ratios, consolidated net worth requirements, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, a minimum unsecured interest expense ratio, a minimum interest coverage ratio, a minimum unsecured debt yield and a minimum unencumbered interest expense ratio. As of March 31, 2020, the most restrictive covenant was the minimum unencumbered interest expense ratio. The Company was in compliance with all of its loan covenants and obligations as of March 31, 2020.

Note 6 – Common Stock

Follow-on Public Offerings

In September 2018, the Company entered into a follow-on public offering of 3,500,000 shares of common stock in connection with a forward sale agreement (the “September 2018 Forward”).  The September 2018 Forward was settled in its entirety in April 2019.   Upon settlement we issued 3,500,000 shares of common stock and received net proceeds of $186.0 million, after deducting fees and expenses.

In April 2019, the Company entered into a follow-on public offering (the “April 2019 Forward”) to sell an aggregate of 3,162,500 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 412,500 shares of common stock. The April 2019 Forward was settled in its entirety in December 2019.  Upon settlement, the Company issued 3,162,500 shares of common stock and received net proceeds of approximately $195.8 million, after deducting fees and expenses.

Refer to Note 13 – Subsequent Events regarding the Company’s April 2020 common stock issuance.  

ATM Programs

2019 ATM Program

In July 2019, the Company entered into a $400.0 million at-the-market equity (“ATM”) program (the “2019 ATM Program”) through which the Company, from time to time, sold shares of common stock. In addition to selling shares of common stock, the Company entered into forward sale agreements through the 2019 ATM Program. During the third quarter of 2019, the Company issued 444,228 shares under the 2019 ATM Program, at an average price of $74.30, realizing gross proceeds of $33.0 million.

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During the fourth quarter of 2019, the Company entered into forward sale agreements in connection with the 2019 ATM Program to sell an aggregate of 2,003,118 shares of common stock (the “2019 ATM Forward Offerings”). During the three months ended March 31, 2020, the Company settled 1,245,118 shares from the 2019 ATM Forward Offerings.  The Company is required to settle the remaining 758,000 shares under the 2019 ATM Forward Offerings by December 2020.  

During the first quarter of 2020, the Company entered into forward sale agreements in connection with the 2019 ATM Program to sell an aggregate of 3,169,754 shares of common stock (the “2020 ATM Forward Offerings”).  During the three months ended March 31, 2020 the Company settled 155,133 shares from the 2020 ATM Forward Offerings. The Company is required to settle the remaining 3,014,621 shares under the 2020 ATM Forward Offerings by certain dates between January 2021 and March 2021.

The 2019 ATM Program was terminated simultaneously with the establishment of the 2020 ATM Program, which is discussed below. As a result, no future issuances will occur under the 2019 ATM Program.

2020 ATM Program

In March 2020, the Company entered into a new $400.0 million ATM program (the “2020 ATM Program”) through which the Company, from time to time, may sell shares of common stock. In addition to selling shares of common stock, the Company may enter into forward sale agreements through the 2020 ATM Program.

During the first quarter of 2020, the Company entered into a forward sale agreement in connection with the 2020 ATM Program to sell an aggregate of 204,074 shares of common stock.  As of March 31, 2020, no shares have been settled under the 2020 ATM Program. The Company is required to settle the 204,074 outstanding shares under the 2020 ATM Program by April 2021.

After considering the 204,074 shares of common stock subject to the forward sale agreement, the Company had approximately $387.3 million of availability remaining under the 2020 ATM Program as of March 31, 2020.

2018 ATM Program

In May 2018, the Company entered into a $250.0 million at-the-market equity program (“2018 ATM Program”) through which the Company, from time to time, sold shares of common stock. In addition to selling shares of common stock, the Company entered into forward sale agreements through the 2018 ATM Program. During the three months ended March 31, 2019, the Company did not issue shares of common stock under the 2018 ATM Program. The 2018 ATM Program was terminated, and no future issuances will occur under the 2018 ATM Program.

Note 7 – Dividends and Distribution Payable

On February 25, 2020, the Company declared a dividend of $0.585 per share (and distributions per Operating Partnership Unit) for the quarter ended March 31, 2020. The holders of the Operating Partnership Units were entitled to an equal distribution per Operating Partnership Unit held as of March 27, 2020. The dividends and distributions payable were recorded as liabilities on the Company’s condensed consolidated balance sheet at March 31, 2020. The dividend has been reflected as a reduction of stockholders’ equity and the distribution has been reflected as a reduction of the limited partners’ non-controlling interest. These amounts were paid on April 9, 2020.

Note 8 – Income Taxes (not presented in thousands)

Uncertain Tax Positions

The Company is subject to the provisions of Financial Accounting Standards Board Accounting Standard Codification 740-10 (“FASB ASC 740-10”) and has analyzed its various federal and state filing positions. The Company believes that its income tax filing positions and deductions are documented and supported. Additionally, the Company believes that its accruals for tax liabilities are adequate. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FASB ASC 740-10. The Company’s federal income tax returns are open for examination by taxing authorities

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for all tax years after December 31, 2015. The Company has elected to record related interest and penalties, if any, as income tax expense on the Consolidated Statements of Operations and Comprehensive Income. We have no material interest or penalties relating to income taxes recognized for the three months ended March 31, 2020 and 2019.

Deferred Taxes

As of December 31, 2018, the Company had accrued a deferred income tax liability in the amount of $475,000. This deferred income tax balance represented the federal and state tax effect of deferring income tax in 2007 on the sale of an asset under section 1031 of the Code. This transaction was accrued within the Company’s TRS entities.  During the three months ended March 31, 2019, the Company restructured its ownership of the TRS to which the deferred tax liability was related, resulting in a reversal of the previously accrued amount.

Income Tax Expense

The Company recognized total federal and state tax benefit (expense) of approximately ($260,000) and $170,000 for the three months ended March 31, 2020 and 2019, respectively.

Note 9 – Derivative Instruments and Hedging Activity

Background

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 the Company’s derivatives (refer to Note 10 – 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 swap agreements as part of its interest rate risk management strategy. Interest rate swap agreements 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.

Recent Activity

In March 2019, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100.0 million of long-term debt. The Company hedged its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period of one year. In May, the Company terminated the swap agreements at the time of pricing the future debt issuance, receiving $0.8 million upon termination. See discussion of the 2031 Senior Unsecured Notes in Note 5 – Debt above.

In June 2019, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100.0 million of long-term debt. The Company is hedging its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending March 2021. As of March 31, 2020, these interest rate swaps were valued as a liability of $15.4 million.

In October 2019, 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 agreements, 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 1.4275%. This swap effectively converts $65.0 million of variable-rate

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borrowings to fixed-rate borrowings from July 12, 2021 to January 12, 2024. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $1.7 million.

Also in October 2019, 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 1.4265%. This swap effectively converts $35.0 million of variable-rate borrowings to fixed-rate borrowings from September 29, 2020 to January 12, 2024. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $1.2 million.

In February 2020, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100.0 million of long-term debt. The Company is hedging its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending March 2021. As of March 31, 2020, these interest rate swaps were valued as a liability of $6.5 million.

Prior Derivative Transactions

In September 2013, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on one month LIBOR and pays to the counterparty a fixed rate of 2.20%. This swap effectively converted $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $0.3 million.

In July 2014, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on one month LIBOR and pays to the counterparty a fixed rate of 2.09%. These swaps effectively converted $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of March 31, 2020, these interest rate swaps were valued as a liability of approximately $1.5 million.

In September 2017, 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 one 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 March 31, 2020, this interest rate swap was valued as a liability of approximately $1.4 million.

In December 2018, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $100.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on one month LIBOR and pays to the counterparty a fixed rate of 2.66%. These swaps effectively converts $100.0 million of variable-rate borrowings to fixed-rate borrowings from December 27, 2018 to January 15, 2026. As of March 31, 2020, these interest rate swaps were valued as a liability of approximately $12.4 million.

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Recognition

On January 1, 2019, the Company adopted ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which provided changes in hedge accounting recognition and presentation requirements. The Company now recognizes all changes in fair value for hedging instruments designated and qualifying for cash flow hedge accounting treatment as a component of Other Comprehensive Income (OCI), as opposed to previously recognizing the ineffective portion, if any, directly in earnings. Upon adoption, there were no adjustments to recognize relating to previously recorded derivatives transactions or amounts.  Net realized gains or losses resulting from derivatives that were settled in conjunction with planned fixed rate financings or refinancings continue to be included in accumulated OCI during the term of the hedged debt transaction.

Amounts reported in accumulated OCI related to currently outstanding interest rate derivatives are recognized as an adjustment to income as interest payments are made on the Company’s variable-rate debt. Realized gains or losses on settled derivative instruments included in accumulated OCI are recognized as an adjustment over the term of the hedged debt transaction. During the next twelve months, the Company estimates that an additional $5.8 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

March 31, 

December 31, 

March 31, 

December 31, 

Interest Rate Derivatives

    

2020

    

2019

    

2020

    

2019

Interest Rate Swap

 

18

 

15

$

240,000

$

240,000

The table below presents the estimated fair value of the Company’s derivative financial instruments, as well as their classification in the condensed consolidated balance sheets (in thousands).

Asset Derivatives

March 31, 2020

December 31, 2019

    

Fair Value

    

Fair Value

Derivatives designated as cash flow hedges:

 

  

 

  

Interest Rate Swaps

$

$

572

Liability Derivatives

March 31, 2020

December 31, 2019

    

Fair Value

    

Fair Value

Derivatives designated as cash flow hedges:

 

  

 

  

Interest Rate Swaps

$

40,396

$

7,943

The table below displays the effect of the Company’s derivative financial instruments in the condensed consolidated statements of  income and comprehensive income for the three months ended March 31, 2020 and 2019 (in thousands).