AGREE REALTY CORP (Form: 10-Q, Received: 10/19/2020 16:08:08)

Asset Derivatives

September 30, 2020

December 31, 2019

Fair Value

Fair Value

Derivatives designated as cash flow hedges:

Other Assets, net

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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 September 30, 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)		(Zip Code)

(248) 737-4190

(Registrant's telephone number, including area code)

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 October 16, 2020, the Registrant had 55,370,525 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 September 30, 2020 and December 31, 2019	1

	Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2020 and 2019	3

	Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2020 and 2019	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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	34

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	48

Item 4:	Controls and Procedures	50

PART II

Item 1:	Legal Proceedings	50

Item 1A:	Risk Factors	50

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3:	Defaults Upon Senior Securities	52

Item 4:	Mine Safety Disclosures	52

Item 5:	Other Information	52

Item 6:	Exhibits	52

SIGNATURES		53

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


	September 30,		December 31,
	2020		2019
ASSETS
Real Estate Investments
Land	$	981,476	$	735,991
Buildings		2,184,620		1,600,293
Less accumulated depreciation		(158,719)		(127,748)
		3,007,377		2,208,536
Property under development		8,229		10,056
Net Real Estate Investments		3,015,606		2,218,592

Real Estate Held for Sale, net		—		3,750

Cash and Cash Equivalents		14,715		15,603

Cash Held in Escrows		1,515		26,554

Accounts Receivable - Tenants		39,309		26,808

Lease Intangibles, net of accumulated amortization of
$114,990 and $89,118 at September 30, 2020 and December 31, 2019, respectively		422,373		343,514

Other Assets, net		54,096		29,709

Total Assets	$	3,547,614	$	2,664,530

See accompanying notes to Condensed Consolidated Financial Statements.

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AGREE REALTY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)


	September 30,		December 31,
	2020		2019
LIABILITIES
Mortgage Notes Payable, net	$	33,304	$	36,698

Unsecured Term Loans, net		237,765		237,403

Senior Unsecured Notes, net		855,232		509,198

Unsecured Revolving Credit Facility		20,000		89,000

Dividends and Distributions Payable		32,522		25,014

Accounts Payable, Accrued Expenses, and Other Liabilities		67,871		48,987

Lease Intangibles, net of accumulated amortization of
$23,067 and $19,307 at September 30, 2020 and December 31, 2019, respectively		35,533		26,668

Total Liabilities		1,282,227		972,968

EQUITY
Common stock, $.0001 par value, 90,000,000 shares
authorized, 55,370,525 and 45,573,623 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		6		5
Preferred Stock, $.0001 par value per share, 4,000,000 shares authorized		—		—
Additional paid-in-capital		2,384,331		1,752,912
Dividends in excess of net income		(80,627)		(57,094)
Accumulated other comprehensive income (loss)		(40,140)		(6,492)

Total Equity - Agree Realty Corporation		2,263,570		1,689,331
Non-controlling interest		1,817		2,231
Total Equity		2,265,387		1,691,562

Total Liabilities and Equity	$	3,547,614	$	2,664,530

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

AGREE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

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

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Revenues
Rental income	$	63,701	$	48,020	$	176,960	$	135,240
Other		109		55		193		102
Total Revenues		63,810		48,075		177,153		135,342

Operating Expenses
Real estate taxes		5,516		3,674		15,058		11,016
Property operating expenses		2,108		1,598		6,303		4,832
Land lease expense		325		354		977		922
General and administrative		4,756		3,832		13,999		11,746
Depreciation and amortization		17,327		11,897		47,067		32,597
Provision for impairment		2,868		—		3,996		1,609
Total Operating Expenses		32,900		21,355		87,400		62,722

Income from Operations		30,910		26,720		89,753		72,620

Other (Expense) Income
Interest expense, net		(10,158)		(8,352)		(28,307)		(23,363)
Gain (loss) on sale of assets, net		970		2,597		7,567		8,973
Income tax (expense) benefit		(306)		(184)		(826)		(210)
Other (expense) income		—		—		23		—
Net Income		21,416		20,781		68,210		58,020

Less net income attributable to non-controlling interest		136		170		444		498

Net Income Attributable to Agree Realty Corporation	$	21,280	$	20,611	$	67,766	$	57,522

Net Income Per Share Attributable to Agree Realty Corporation
Basic	$	0.39	$	0.49	$	1.33	$	1.43
Diluted	$	0.39	$	0.48	$	1.32	$	1.41

Other Comprehensive Income
Net income	$	21,416	$	20,781	$	68,210	$	58,020
Other comprehensive income (loss) - change in fair value and settlement of interest rate swaps		1,420		(7,418)		(33,883)		(13,815)
Total comprehensive income (loss)		22,836		13,363		34,327		44,205
Less comprehensive income (loss) attributable to non-controlling interest		152		109		187		367

Comprehensive Income (Loss) Attributable to Agree Realty Corporation	$	22,684	$	13,254	$	34,140	$	43,838

Weighted Average Number of Common Shares Outstanding - Basic		53,721,956		41,832,457		50,637,569		39,992,703

Weighted Average Number of Common Shares Outstanding - Diluted		54,555,672		42,318,042		51,151,462		40,625,441

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

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 2014 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 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
Issuance of common stock, net of issuance costs	6,851,695		—		437,100		—		—		—		437,100
Repurchase of common shares	(51)		—		(3)		—		—		—		(3)
Forfeiture of restricted stock	(2,661)		—		—		—		—		—		—
Stock-based compensation	—		—		1,224		—		—		—		1,224
Dividends and distributions declared for the period	—		—		—		(32,311)		—		(209)		(32,520)
Other comprehensive income (loss) - change in fair value and gain (loss) on settlement of interest rate swaps	—		—		—		—		(2,253)		(8)		(2,261)
Net income	—		—		—		25,258		—		166		25,424
Balance, June 30, 2020	53,851,092	$	5	$	2,295,235	$	(69,595)	$	(41,544)	$	1,875	$	2,185,976
Issuance of common stock, net of issuance costs	1,515,000		1		87,870		—		—		—		87,871
Repurchase of common shares	(108)		—		(7)		—		—		—		(7)
Issuance of restricted stock under the 2020 Omnibus Incentive Plan	4,541		—		—		—		—		—		—
Stock-based compensation	—		—		1,233		—		—		—		1,233
Dividends and distributions declared for the period	—		—		—		(32,312)		—		(210)		(32,522)
Other comprehensive income (loss) - change in fair value and settlement of interest rate swaps	—		—		—		—		1,404		16		1,420
Net income	—		—		—		21,280		—		136		21,416
Balance, September 30, 2020	55,370,525	$	6	$	2,384,331	$	(80,627)	$	(40,140)	$	1,817	$	2,265,387

Cash dividends declared per common share:
For the three months ended March 31, 2020		$	0.585
For the three months ended June 30, 2020		$	0.600
For the three months ended September 30, 2020		$	0.600

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 2014 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 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
Issuance of common stock, net of issuance costs	3,512,500		—		186,667		—		—		—		186,667
Stock-based compensation	—		—		1,025		—		—		—		1,025
Dividends and distributions declared for the period	—		—		—		(23,922)		—		(197)		(24,119)
Other comprehensive income (loss) - change in fair value and gain (loss) on settlement of interest rate swaps	—		—		—		—		(3,761)		(33)		(3,794)
Net income	—		—		—		18,564		—		158		18,722
Balance, June 30, 2019	41,967,282	$	4	$	1,522,644	$	(51,298)	$	(5,711)	$	2,284	$	1,467,923
Issuance of common stock, net of issuance costs	444,251		—		32,452		—		—		—		32,452
Repurchase of common shares	(82)		—		(4)		—		—		—		(4)
Issuance of restricted stock under the 2014 Omnibus Incentive Plan	1,399		—		—		—		—		—		—
Forfeiture of restricted stock	(23)		—		(2)		—		—		—		(2)
Stock-based compensation	—		—		1,034		—		—		—		1,034
Dividends and distributions declared for the period	—		—		—		(24,154)		—		(198)		(24,352)
Other comprehensive income (loss) - change in fair value and settlement of interest rate swaps	—		—		—		—		(7,357)		(61)		(7,418)
Net income	—		—		—		20,611		—		170		20,781
Balance, September 30, 2019	42,412,827	$	4	$	1,556,124	$	(54,841)	$	(13,068)	$	2,195	$	1,490,414

Cash dividends declared per common share:
For the three months ended March 31, 2019		$	0.555
For the three months ended June 30, 2019		$	0.570
For the three months ended September 30, 2019		$	0.570

See accompanying notes to Condensed Consolidated Financial Statements.

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AGREE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended
	September 30, 2020		September 30, 2019
Cash Flows from Operating Activities
Net income	$	68,210	$	58,020
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		47,067		32,597
Amortization from above (below) market lease intangibles, net		11,552		9,882
Amortization from financing and credit facility costs		1,029		966
Stock-based compensation		3,471		2,972
Provision for impairment		3,996		1,609
Settlement of interest rate swaps		(23,169)		802
(Gain) loss on sale of assets		(7,567)		(8,973)
(Increase) decrease in accounts receivable		(13,484)		(4,468)
(Increase) decrease in other assets		(1,364)		47
Increase (decrease) in accounts payable, accrued expenses, and other liabilities		1,114		(4,911)
Net Cash Provided by Operating Activities		90,855		88,543

Cash Flows from Investing Activities
Acquisition of real estate investments and other assets		(964,974)		(568,523)
Development of real estate investments and other assets
(including capitalized interest of $109 in 2020, $321 in 2019)		(14,343)		(13,880)
Payment of leasing costs		(388)		(292)
Net proceeds from sale of assets		45,983		34,513
Net Cash Used in Investing Activities		(933,722)		(548,182)

Cash Flows from Financing Activities
Proceeds from common stock offerings, net		629,586		276,960
Repurchase of common shares		(1,637)		(1,400)
Unsecured revolving credit facility borrowings (repayments), net		(69,000)		229,000
Payments of mortgage notes payable		(3,474)		(2,650)
Payments of unsecured term loans		—		(18,543)
Senior unsecured notes proceeds		349,745		—
Dividends paid		(83,798)		(66,102)
Distributions to non-controlling interest		(615)		(582)
Payments for financing costs		(3,867)		(217)
Net Cash Provided by Financing Activities		816,940		416,466

Net Increase (Decrease) in Cash and Cash Equivalents and Cash Held in Escrow		(25,927)		(43,173)
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	$	16,230	$	10,802

Supplemental Disclosure of Cash Flow Information
Cash paid for interest (net of amounts capitalized)	$	25,351	$	25,496
Cash paid for income tax	$	1,137	$	754

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
Operating lease right of use assets disposed of upon acquisition of underlying ground leased land	$	—	$	(3,059)
Dividends and limited partners’ distributions declared and unpaid	$	32,522	$	24,353
Accrual of development, construction and other real estate investment costs	$	7,665	$	7,331

See accompanying notes to Condensed Consolidated Financial Statements.

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AGREE REALTY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 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”), a Delaware limited partnership, of which Agree Realty Corporation is the sole general partner and in which it held a 99.4% interest as of September 30, 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 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 and nine months ended September 30, 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 99.4% and 99.2% of the Operating Partnership as of September 30, 2020 and December 31, 2019, respectively. All material intercompany accounts and transactions have been eliminated.

At September 30, 2020 and December 31, 2019, the non-controlling interest in the Operating Partnership consisted of a 0.6% and 0.8% ownership interest in the Operating Partnership held by the Company’s founder/chairman, 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 55,718,144 shares of common stock outstanding at September 30, 2020.

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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. The COVID-19 pandemic has had repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted economic activity and has contributed to significant volatility and negative pressure in financial markets. The COVID-19 pandemic has resulted in a number of our tenants temporarily closing their stores and requesting rent deferral or rent abatement during this pandemic.

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. Certain tenants have sought to modify such obligations and may seek additional relief and additional tenants may 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.

As a result of COVID-19, we have received numerous rent relief requests, most often in the form of rent deferrals. We have evaluated, and continue to evaluate, each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests have resulted in modification agreements, nor is the Company forgoing its contractual rights under its lease agreements. Since the onset of COVID-19, we have entered into lease modifications that deferred 4% and 2% of rent originally contracted for the three months ended June 30, 2020 and September 30, 2020, respectively, and have collected approximately 92% and 97% of rent payments originally contracted for these periods, respectively. Rent deferral percentages disclosed above are net of any repayments that have since occurred.

The extent to which the COVID-19 pandemic continues to impact 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.

The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies. However, as a result of the many uncertainties surrounding the COVID-19 pandemic, we are unable to predict the impact that it ultimately will have on its financial condition, results of operations and cash flows.

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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 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

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one year. The Company did not classify any operating properties as held for sale at September 30, 2020, the assets for which would have been separately presented in the Condensed Consolidated Balance Sheets.

Real estate held for sale consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020		December 31, 2019
Land	$	—	$	2,269
Building		—		2,315
Lease intangibles - asset		—		—
		—		4,584
Accumulated depreciation and amortization		—		(834)
Total Real Estate Held for Sale, net	$	—	$	3,750

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.

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The following schedule summarizes the Company’s amortization of lease intangibles for the three and nine months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Lease intangibles (in-place)	$	4,408	$	2,854	$	11,971	$	7,298
Lease intangibles (above-market)		5,338		4,562		15,607		13,297
Lease intangibles (below-market)		(1,374)		(1,181)		(4,055)		(3,415)
Total	$	8,372	$	6,235	$	23,523	$	17,180

The following schedule represents estimated future amortization of lease intangibles as of September 30, 2020 (in thousands):


	2020
Year Ending December 31,	(remaining)		2021		2022		2023		2024		Thereafter		Total
Lease intangibles (in-place)	$	5,529	$	19,342	$	18,242	$	17,246	$	15,812	$	88,250	$	164,421
Lease intangibles (above-market)		5,876		23,317		22,370		21,460		19,791		165,138		257,952
Lease intangibles (below-market)		(1,651)		(6,032)		(5,109)		(4,277)		(3,563)		(14,901)		(35,533)
Total	$	9,754	$	36,627	$	35,503	$	34,429	$	32,040	$	238,487	$	386,840

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 through 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 of 1986, as amended (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 $15.5 million and $40.9 million in cash and cash held in escrow as of September 30, 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.

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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 the Condensed Consolidated Balance Sheets. The balance of straight-line rent receivables at September 30, 2020 and December 31, 2019 was $27.6 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. During 2020, the Company’s assessment has specifically included the impact of the COVID-19 pandemic, which represents a material risk to collectability (see Significant Risks and Uncertainties above). In the event that collectability with respect to any tenant changes, the Company recognizes an adjustment to rental income. The Company’s review of collectability of charges under its operating leases includes any accrued rental income related to the straight-line method of reporting rental income. As of September 30, 2020, the Company has five tenants where collection is no longer considered probable. For these tenants, the Company is recording rental income on a cash basis. Writing off any outstanding receivables, including straightline rent receivables, for these tenants had an immaterial impact to Rental Income and Net Income for each of the three- and nine- month period ended September 30, 2020.

The Company’s leases provide for reimbursement from tenants for common area maintenance, 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 September 30, 2020 and December 31, 2019 was $3.1 million and $2.6 million, respectively.

The Company adopted FASB ASC Topic-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.

Rent Concessions – COVID-19

During the second and third quarters of 2020, the Company has provided lease concessions to certain tenants in response to the impact of COVID-19, in the form of rent deferrals. The Company has made an election to account for such lease concessions consistent with how those concessions would be accounted for under ASC 842 if enforceable rights and obligations for those concessions had already existed in the leases. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in our rights as lessor, including concessions that result in the total payments required by the modified lease being substantially the same as or less than total payments required by the original lease.

Substantially all of the Company’s concessions to date provide for a deferral of payments with no substantive changes to the consideration in the original lease. These deferrals affect the timing, but not the amount, of the lease payments. The Company is accounting for these deferrals as if no changes to the lease were made. Under this accounting, the Company increases its lease receivable as tenant payments accrue and continues to recognize rental income. To date, the Company has entered into lease concessions that deferred 4% and 2% of rent originally contracted for in the second and third quarters of 2020, respectively. Such rent deferral percentages are net of any repayments that have since occurred.

Sales Tax

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

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Earnings per Share

Earnings per common share has been computed pursuant to the guidance in 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				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Net income attributable to Agree Realty Corporation	$	21,280	$	20,611	$	67,766	$	57,522
Less: Income attributable to unvested restricted shares		(69)		(98)		(233)		(283)
Net income used in basic and diluted earnings per share	$	21,211	$	20,513	$	67,533	$	57,239

Weighted average number of common shares outstanding		53,902,541		42,034,685		50,818,154		40,194,931
Less: Unvested restricted stock		(180,585)		(202,228)		(180,585)		(202,228)
Weighted average number of common shares outstanding used in basic earnings per share		53,721,956		41,832,457		50,637,569		39,992,703

Weighted average number of common shares outstanding used in basic earnings per share		53,721,956		41,832,457		50,637,569		39,992,703
Effect of dilutive securities: share-based compensation		85,380		109,027		87,111		102,845
Effect of dilutive securities: September 2018 forward equity offering		—		—		—		359,713
Effect of dilutive securities: April 2019 forward equity offering		—		376,558		—		170,180
Effect of dilutive securities: 2019 ATM forward equity offerings		—		—		19,053		—
Effect of dilutive securities: 2020 ATM forward equity offerings		22,515		—		16,934		—
Effect of dilutive securities: April 2020 forward equity offering		725,821		—		390,795		—
Weighted average number of common shares outstanding used in diluted earnings per share		54,555,672		42,318,042		51,151,462		40,625,441

For the three months ended September 30, 2020, 4,510 shares of common stock related to the 2020 at-the-market (“ATM”) forward equity offerings, 3,139 shares of restricted common stock granted in 2020, and 6,390 performance units granted in 2020 were anti-dilutive and were not included in the computation of diluted earnings per share.

For the nine months ended September 30, 2020, 22,820 shares of common stock related to the 2019 ATM forward equity offerings, 34,899 shares of common stock included in the 2020 ATM forward equity offerings, 2,355 shares of restricted common stock granted in 2020 and 5,887 performance units granted in 2020 were anti-dilutive and were not included in the computation of diluted earnings per share.

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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 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 September 30, 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 entities 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 the Condensed Consolidated 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 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.

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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 Condensed Consolidated 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 August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). The guidance in ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in the ASU 2020-06 also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The amendments in ASU 2020-06 are effective for the Company for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The guidance must be adopted as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new guidance.

In April 2020, the FASB staff issued a question-and-answer document (the “Q&A document”) to address questions on the application of lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic. Prior to the issuance of this document, changes to lease payments not stipulated in an original lease were generally accounted for as lease modifications under ASC 842. The Q&A document now provides for a policy election to be made to account for

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COVID-19 pandemic-related concessions (1) as lease modifications or (2) as they would otherwise be accounted for under ASC 842 if enforceable rights and obligations for those concessions had already existed in the lease. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor, including concessions that result in the total payments required by the modified lease being substantially the same as or less than the total payments required by the original lease. Refer to Rent Concessions – COVID 19 above regarding the Company’s election and other accounting related to the topic.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”). 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. 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 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 ASC Topic 820, Fair Value Measurements and Disclosure (“ASC 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 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 ASU 2016-02, “Leases (Topic 842),” not ASU 2016-13. 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 2016-02, “Leases” (“ASU 2016-02”). The new standard creates ASC 842 and supersedes ASC Topic 840, Leases, which the Company adopted on January 1, 2019 along with related interpretations. The adoption of ASU 2016-02 generally had, and will have, the following impacts on the Company:

•

ASC 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 Sheets. 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 leases as lessee, has increased the balances of the right to use assets and lease liabilities to $40.0 million and $15.9 million as of September 30, 2020, respectively.

•

ASC 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

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standard. However, ASC 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 ASC 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 Operations and Comprehensive Income.

•

Under ASC 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.

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 September 30, 2020, the Company’s portfolio was approximately 99.8% 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 62.2% 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, places 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 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 842 to the combined component.

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The following table includes information regarding the Company’s operating leases for which it is the lessor, for the three and nine months ended September 30, 2020 and September 30, 2019. (presented in thousands)


	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Total lease payments	$	65,762	$	49,463	$	184,144	$	140,071
Less: Variable lease payments		6,897		4,868		19,981		15,168
Total Non-Variable Lease Payments	$	58,865	$	44,595	$	164,163	$	124,903


	2020
Year Ending December 31,	(remaining)		2021		2022		2023		2024		Thereafter		Total
Future Lease Payments	$	63,293	$	253,841	$	253,056	$	248,988	$	239,171	$	1,540,746	$	2,599,095

Deferred Revenue

As of September 30, 2020, and December 31, 2019, there was $3.3 million and $4.1 million, respectively, in deferred revenues resulting from rents paid in advance.

Land Lease Obligations

The Company is the lessee under land lease agreements for certain of its properties, substantially all of which qualified as operating leases as of September 30, 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 $0.4 million for the three months ended September 30, 2020 and 2019, respectively and $1.0 million and $0.9 million of the nine months ended September 30, 2020 and 2019, respectively. The Company has a single land lease agreement that qualified as a finance lease as of September 30, 2020 due to the existence of a purchase option that is reasonably assured of being exercised. No lease or interest expense is being incurred relating to this property and all current and future rental payments have already been made.

In calculating its lease obligations under 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.

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The following tables include information on the Company’s land leases for which it is the lessee, for the three and nine months ended September 30, 2020 and September 30, 2019. (presented in thousands)


	Three Months Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Operating lease costs	$	325		$	354		$	973		$	925
Variable lease costs		—			—			—			—
Total Non-Variable Lease Costs	$	325		$	354		$	973		$	925

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		—			(3,025)			—			(3,025)
Right-of-use assets net change	$	—		$	(3,025)		$	—		$	16,647

Operating cash outflows on operating leases	$	267		$	297		$	802		$	805

Weighted-average remaining lease term - operating leases (years)		38.2			38.3			38.2			38.3

Weighted-average discount rate - operating leases		4.13	%		4.13	%		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	$	267	$	1,015	$	789	$	789	$	789	$	30,584	$	34,233
Imputed interest		(164)		(645)		(634)		(628)		(621)		(15,634)		(18,326)
Total Lease Liabilities	$	103	$	370	$	155	$	161	$	168	$	14,950	$	15,907

Note 4 – Real Estate Investments

Real Estate Portfolio

As of September 30, 2020, the Company owned 1,027 operating properties located in 45 states, with a total gross leasable area (“GLA”) of approximately 21.0 million square feet. Net Real Estate Investments totaled $3.0 billion as of September 30, 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.

Acquisitions

During the three months ended September 30, 2020, the Company purchased 91 retail net lease assets for approximately $458.8 million, which includes acquisition and closing costs. These properties are located in 26 states and are leased for a weighted average lease term of approximately 11.5 years.

During the nine months ended September 30, 2020, the Company purchased 217 retail net lease assets for approximately $958.3 million, which includes acquisition and closing costs. These properties are located in 35 states and are leased for a weighted average lease term of approximately 11.2 years.

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The aggregate acquisitions for the nine months ended September 30, 2020 were allocated $248.2 million to land, $588.6 million to buildings and improvements, $97.0 million to lease intangibles and $24.5 million to right of use assets. 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 nine 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 September 30, 2020.

Developments

During the three months ended September 30, 2020, the Company completed two development or Partner Capital Solutions projects.

During the nine months ended September 30, 2020, the Company completed six developments or Partner Capital Solutions projects. At September 30, 2020, the Company had four development or Partner Capital Solutions projects under construction.

Dispositions

During the three months ended September 30, 2020, the Company sold two properties for net proceeds of $3.4 million and the Company recorded a net gain of $1.0 million.

During the nine months ended September 30, 2020, the Company sold 16 properties for net proceeds of $46.0 million and the Company recorded a net gain of $7.6 million.

Provision for Impairment

As a result of our review of Real Estate Investments, the Company recognized provisions for impairments of $2.9 million for the three months ended September 30, 2020 and no provisions for impairments for the three months ended September 30, 2019, and $4.0 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively. The estimated fair value of the impaired real estate assets at their time of impairment during the nine months ended September 30, 2020 was $4.5 million.

Note 5 – Debt

As of September 30, 2020, the Company had total gross indebtedness of $1.2 billion, including (i) $33.6 million of mortgage notes payable; (ii) $240.0 million of unsecured term loans; (iii) $860.0 million of senior unsecured notes; and (iv) $20.0 million of borrowings under the Revolving Credit Facility (defined below).

Mortgage Notes Payable

As of September 30, 2020, the Company had total gross mortgage indebtedness of $33.6 million, which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $40.1 million. Including mortgages that have been swapped to a fixed interest rate, the weighted average interest rate on the Company’s mortgage notes payable was 4.22% as of September 30, 2020 and 4.40% as of December 31, 2019.

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	September 30, 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		4,639		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		5,363		5,921

Total principal		33,642		37,115
Unamortized debt issuance costs		(338)		(417)
Total	$	33,304	$	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 September 30, 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 September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 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		(2,235)		(2,597)
Total	$	237,765	$	237,403

In August 2016, the Company entered into a $20.3 million unsecured amortizing term loan that matured May 2019 and that was swapped to an all-in rate of 3.62% (the “2019 Term Loan”). 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 September 30, 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 September 30, 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 September 30, 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 and original issue discount as of September 30, 2020, and December 31, 2019 (in thousands):


	September 30, 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
2030 Senior Unsecured Public Notes		350,000		—
2031 Senior Unsecured Notes		125,000		125,000
Total Principal		860,000		510,000
Unamortized debt issuance costs and original issue discount		(4,768)		(802)
Total	$	855,232	$	509,198

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”).

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.

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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%.

All of the senior unsecured notes described in the preceding paragraphs were sold solely to institutional investors in private placements pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

In August 2020, the Operating Partnership completed an underwritten public offering of $350.0 million aggregate principal amount of 2.900% Notes due 2030 (the “2030 Senior Unsecured Public Notes”). The 2030 Senior Unsecured Public Notes are fully and unconditionally guaranteed by Agree Realty Corporation and certain wholly owned subsidiaries of the Operating Partnership. The terms of the 2030 Senior Unsecured Public Notes are governed by an indenture, dated August 17, 2020, among the Operating Partnership, the Company and U.S. Bank National Association, as trustee (as amended and supplemented by an officer’s certificate dated August 17, 2020, the “Indenture”). The Indenture contains various restrictive covenants, including limitations on the ability of the guarantors and the issuer to incur additional indebtedness and requirements to maintain a pool of unencumbered assets. The Company terminated related swap agreements of $200.0 million that hedged the 2030 Senior Unsecured Public Notes. Considering the effect of the terminated swap agreements, the blended all-in rate to the Company for the $350.0 million aggregate principal amount of 2030 Senior Unsecured Public Notes is 3.49%.

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”), the $65 Million Term Loan and the $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 (the “Reimbursement Agreement”). 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 September 30, 2020 (in thousands):


	Scheduled		Balloon
	Principal		Payment		Total
Remainder of 2020	$	240	$	—	$	240
2021		998		—		998
2022		1,060		—		1,060
2023		1,069		67,656		68,725
2024 ⁽¹⁾		963		120,000		120,963
Thereafter		1,656		960,000		961,656
Total scheduled principal payments		5,986		1,147,656		1,153,642
Original issue discount		—		(252)		(252)
Total	$	5,986	$	1,147,404	$	1,153,390

(1)	The Revolving Credit Facility matures in January 2024, with options to extend the maturity as described under Senior Unsecured Revolving Credit Facility above. The Revolving Credit Facility had a balance of $20.0 million as of September 30, 2020.

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 September 30, 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 September 30, 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, the Company 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.

In April 2020, the Company completed a follow-on public offering of 2,875,000 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 375,000 shares of common stock. Upon closing, the Company issued 2,875,000 shares of common stock and received net proceeds of $170.4 million, after deducting fees and expenses.

Also in April 2020, the Company entered into a follow-on public offering to sell an aggregate of 6,166,666 shares of common stock in connection with a forward sale agreement (the “April 2020 Forward”). During the three months ended September 30, 2020, the Company settled 1,515,000 shares of common stock under the April 2020 Forward, realizing net

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proceeds of approximately $88.0 million. The remaining shares of common stock under the April 2020 Forward are required to be settled no later than April 20, 2021.

ATM Programs

2019 ATM Program

In July 2019, the Company entered into a $400.0 million ATM program (the “2019 ATM Program”) through which the Company, from time to time, sold shares of common stock. During the third quarter of 2019, the Company issued 444,228 shares of common stock under the 2019 ATM Program, at an average price of $74.30, realizing gross proceeds of $32.6 million. In addition to selling shares of common stock, the Company also entered into forward sale agreements through the 2019 ATM Program, as described below.

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. Additionally, 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. During 2020, the Company settled all forward sale agreements under the 2019 ATM Program, realizing net proceeds of $359.5 million.

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 has entered into forward sale agreements through the 2020 ATM Program, as described below.

The Company is required to settle outstanding shares under the 2020 ATM Program by various dates between April and September 2021.

After considering the 1,628,772 shares of common stock subject to forward sale agreements and including shares issued under the 2020 ATM Program, the Company had approximately $278.0 million of availability remaining under the 2020 ATM Program as of September 30, 2020.

2018 ATM Program

In May 2018, the Company entered into a $250.0 million ATM program (“2018 ATM Program”) through which the Company, from time to time, sold shares of common stock. During the nine months ended September 30, 2019, the Company issued 886,768 shares of common stock under the 2018 ATM Program, realizing net proceeds of approximately $58.5 million. The 2018 ATM Program was subsequently terminated, and no future issuances will occur under the 2018 ATM Program.

Note 7 – Dividends and Distribution Payable

On September 9, 2020, the Company declared a dividend of $0.60 per share (and distributions per Operating Partnership Unit) for the quarter ended September 30, 2020. The holder of the Operating Partnership Units is entitled to an equal distribution per Operating Partnership Unit held as of September 25, 2020. The dividends and distributions payable were recorded as liabilities on the Condensed Consolidated Balance Sheets at September 30, 2020. The dividend has been

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reflected as a reduction of stockholders’ equity and the distribution has been reflected as a reduction of the limited partners’ non-controlling interest. These amounts were paid on October 9, 2020.

Note 8 – Income Taxes (not presented in thousands)

Uncertain Tax Positions

The Company is subject to the provisions of FASB ASC Topic 740-10 (“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 ASC 740-10. The Company’s federal income tax returns are open for examination by taxing authorities 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 and nine months ended September 30, 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 Internal Revenue Code. This transaction was accrued within the Company’s TRS entities. During the nine months ended September 30, 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 expense of approximately $306,000 and $184,000 for the three months ended September 30, 2020 and 2019, respectively and approximately $826,000 and $210,000 for the nine months ended September 30, 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

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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 hedged its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending March 2021. In August 2020, the Company terminated the swap agreements upon the debt issuance, paying $16.1 million upon termination. See discussion of the 2030 Senior Unsecured Public Notes in Note 5 – Debt above.

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 borrowings to fixed-rate borrowings from July 12, 2021 to January 12, 2024. As of September 30, 2020, this interest rate swap was valued as a liability of approximately $2.0 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 September 30, 2020, this interest rate swap was valued as a liability of approximately $1.5 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 hedged its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending March 2021. In August 2020, the Company terminated the swap agreements upon the debt issuance, paying $7.3 million upon termination. See discussion of the 2030 Senior Unsecured Public Notes in Note 5 – Debt above.

In August 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 February 2022. As of September 30, 2020, these interest rate swaps were valued as an asset of approximately $0.3 million.

Prior Derivative Transactions

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 September 30, 2020, these interest rate swaps were valued as a liability of approximately $1.0 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 September 30, 2020, this interest rate swap was valued as a liability of approximately $1.4 million.

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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 September 30, 2020, these interest rate swaps were valued as a liability of approximately $12.5 million.

Recognition

On January 1, 2019, the Company adopted ASU 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 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 $6.7 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 ¹
	September 30,	December 31,	September 30,		December 31,
Interest Rate Derivatives	2020	2019	2020		2019
Interest rate swap	14	15	$	405,000	$	440,000

¹ Number of Instruments and total Notional disclosed includes all interest rate swap agreements outstanding at the balance sheet date, including forward-starting swaps prior to their effective date.

The table below presents the estimated fair value of the Company’s interest rate swaps, as well as their classification in the Condensed Consolidated Balance Sheets (in thousands).

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The table below displays the effect of the Company’s derivative financial instruments in the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (in thousands).

Location of

Derivatives in

Income/(Loss)

Cash Flow

Reclassified from

Amount of Income/(Loss)

Hedging

Amount of Income/(Loss) Recognized

Accumulated OCI

Reclassified from

Relationships

in OCI on Derivative

into Income

Accumulated OCI into Expense

Three Months Ended September 30,

2020

2019

2020

2019

Interest rate swaps

(70)

(7,418)

Interest Expense

1,490


Nine Months Ended September 30,		2020		2019			2020		2019

	Interest rate swaps	$	(36,739)	$	(14,617)	Interest Expense	$	2,856	$	366

The Company does not use derivative instruments for trading or other speculative purposes and did not have any other derivative instruments or hedging activities as of September 30, 2020.

Credit-risk-related Contingent Features

The Company has agreements with 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 default on the indebtedness.

As of September 30, 2020, 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 $18.8 million.

Although the derivative contracts are subject to master netting arrangements, which serve as credit mitigants to both the Company and its counterparties under certain situations, the Company does not net its derivative fair values or any existing rights or obligations to cash collateral on the Condensed Consolidated Balance Sheets.

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The table below presents a gross presentation of the effects of offsetting and a net presentation of the Company’s derivatives as of September 30, 2020 and December 31, 2019. 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 Condensed Consolidated Balance Sheets (in thousands):

Offsetting of Derivative Assets as of September 30, 2020

Gross Amounts

Net Amounts of

Offset in the

Assets presented

Gross Amounts Not Offset in the

Gross Amounts

Statement of

in the Statement

Statement of Financial Position

of Recognized

Financial

of Financial

Financial

Cash Collateral

Assets

Position

Instruments

Received

Net Amount

Derivatives

283

—

283

(155)

—

128

Offsetting of Derivative Liabilities as of September 30, 2020

Net Amounts of

Gross Amounts

Liabilities

Offset in the

presented in the

Gross Amounts Not Offset in the

Gross Amounts

Statement of

Statement of Financial Position

of Recognized

Financial

Cash Collateral

Liabilities

Position

Instruments

Posted

Net Amount

Derivatives

18,369

—

18,369

(155)

—

18,214

Offsetting of Derivative Assets as of December 31, 2019

Gross Amounts

Net Amounts of

Offset in the

Assets presented

Gross Amounts Not Offset in the

Gross Amounts

Statement of

in the Statement

Statement of Financial Position

of Recognized

Financial

of Financial

Financial

Cash Collateral

Assets

Position

Instruments

Received

Net Amount

Derivatives

572

—

572

(572)

—

Offsetting of Derivative Liabilities as of December 31, 2019

Net Amounts of

Gross Amounts

Liabilities

Offset in the

presented in the

Gross Amounts Not Offset in the

Gross Amounts

Statement of

Statement of Financial Position

of Recognized

Financial

Cash Collateral

Liabilities

Position

Instruments

Posted

Net Amount

Derivatives

7,943

—

7,943

(572)

—

7,371

Note 10 – Fair Value Measurements

Assets and Liabilities Measured at Fair Value

The Company accounts for fair values in accordance with 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

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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 September 30, 2020, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 (in thousands):


	Total Fair Value		Level 2
September 30, 2020
Derivative assets - interest rate swaps	$	283	$	283
Derivative liabilities - interest rate swaps	$	18,369	$	18,369

December 31, 2019
Derivative assets - interest rate swaps	$	572	$	572
Derivative liabilities - interest rate swaps	$	7,943	$	7,943

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Other Financial Instruments

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 its debt based on its 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, which is a Level 2 non-recurring measurement, 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, excluding the value of the derivatives) with carrying values of $1.1 billion and $783.3 million as of September 30, 2020 and December 31, 2019, respectively, had fair values of $1.3 billion and $817.7 million, respectively. Variable rate debt’s fair value is estimated to be equal to the carrying values of $20.0 million and $89.0 million, as of September 30, 2020 and December 31, 2019, respectively.

Note 11 – Equity Incentive Plan

In May 2020, the Company’s stockholders approved the 2020 Omnibus Incentive Plan (the “2020 Plan”), which replaced the 2014 Omnibus Equity Incentive Plan (the “2014 Plan”). The 2020 Plan provides for the award to employees, directors and consultants of the Company of options, restricted stock, restricted stock units, stock appreciation rights, performance awards (which may take the form of performance units or performance shares) and other awards to acquire up to an aggregate of 700,000 shares of the Company’s common stock. All subsequent awards of equity or equity rights will be granted under the 2020 Plan, and no further awards will be made under the 2014 Plan. As of September 30, 2020, 695,459 shares of common stock were available for issuance under the 2020 Plan.

Restricted Stock

Restricted common stock has been granted to certain employees and directors.

The holder of a restricted share award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The restricted shares vest over a five-year period based on continued service to the Company.

The Company estimates the fair value of restricted stock grants at the date of grant and amortizes those amounts into expense on a straightline basis or amount vested, if greater, over the appropriate vesting period. The Company recognized expense relating to restricted stock grants of $0.8 million and $0.8 million for the three months ended September 30, 2020 and 2019, respectively, and $2.4 million and $2.2 million for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, there was $8.8 million of total unrecognized compensation costs related to the outstanding restricted stock, which is expected to be recognized over a weighted average period of 3.4 years. The Company used 0% for the forfeiture rate for determining the fair value of restricted stock. The intrinsic value of restricted shares redeemed was $1.6 million and $1.4 million for the nine months ended September 30, 2020 and 2019, respectively.

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Restricted stock activity is summarized as follows:


	Shares	Weighted Average
	Outstanding	Grant Date
	(in thousands)	Fair Value
Unvested restricted stock at December 31, 2019	194	$	50.71

Restricted stock granted	52	$	78.43
Restricted stock vested	(62)	$	45.45
Restricted stock forfeited	(3)	$	62.73

Unvested restricted stock at September 30, 2020	181	$	60.26

Performance Units

On February 23, 2020, certain executive officers received performance units. Performance units are subject to a three-year performance period, at the conclusion of which, shares awarded are to be determined by the Company’s total shareholder return compared to the constituents of the MSCI US REIT Index and a defined peer group. 50% of the award is based upon the total shareholder return percentile rank versus the MSCI US REIT index for the three-year performance period; and 50% of the award is based upon TSR percentile rank versus a specified net lease peer group for the three-year performance period. Vesting of the performance units following their issuance will occur ratably over a three-year period, with the initial vesting occurring immediately following the conclusion of the performance period such that all shares vest within five years of the original award date of February 23, 2020.

The grant date fair value of these awards is determined using a Monte Carlo simulation pricing model and compensation expense is amortized on an attribution method over a five-year period. The Monte Carlo simulation pricing model for the 2020 grants utilized the following assumptions: (i) expected term of 2.9 years (equal to the remaining performance measurement period at the grant date), (ii) volatility of 18.4% (based on historical volatility), (iii) dividend yield of 2.9% (based on the most recently paid dividend at grant date), (iv) risk-free rate of 1.3% (interpolated based on 2- and 3-year rates). Compensation expense related to performance units is determined at the grant date and is not adjusted throughout the measurement or vesting periods.

The Company recognized expense related to performance units of $0.4 million and $0.2 million, for the three months ended September 30, 2020 and 2019, respectively, and $1.1 million and $0.6 million, for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, there was $3.7 million of total unrecognized compensation costs related to the outstanding performance units, which is expected to be recognized over a weighted average period of 3.6 years. The Company used 0% for the forfeiture rate for determining the fair value of performance units.

Prior to 2019, the Company’s equity incentive plan utilized performance shares instead of units. These performance shares had substantially identical terms to the performance units described above.

Performance share and unit activity is summarized as follows:


	Target Number
	of Awards	Weighted Average
	(in thousands)	Grant Date
Performance units and shares at December 31, 2019	61	$	56.57

Performance units granted	26	$	79.62

Performance units and shares at September 30, 2020	87	$	63.35

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Note 12 – Commitments and Contingencies

In the ordinary course of business, we are party to various legal actions which we believe are routine in nature and incidental to the operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our consolidated financial position or results of operations.

Note 13 – Subsequent Events

In connection with the preparation of its financial statements, the Company has evaluated events that occurred subsequent to September 30, 2020 through the date on which these financial statements were issued to determine whether any of these events required disclosure in the financial statements.

In October, 2020, the Company entered into a new employment agreement with Joel Agree to extend Mr. Agree’s term as President and Chief Executive Officer of the Company through September 30, 2023 (the “Agreement”). The Agreement supersedes Mr. Agree’s prior employment agreement with the Company, which had a term that was scheduled to expire on June 30, 2021. The term of Mr. Agree’s employment under the Agreement extends through September 30, 2023, and will automatically renew for successive two-year periods unless either party provides notice of non-renewal at least 60 days prior to the expiration of any term. The Agreement revises and updates, as applicable, Mr. Agree’s salary, incentive compensation, termination, death and disability, and change in control provisions, as well as provides for a one-time extension bonus.

There were no other reportable subsequent events or transactions.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with the Interim Condensed Consolidated Financial Statements of Agree Realty Corporation (the “Company”), a Maryland corporation, including the respective notes thereto, which are included in this Quarterly Report on Form 10-Q. The terms the “Company,” “Management,” “we,” “our” and “us” refer to Agree Realty Corporation and all of its consolidated subsidiaries, including Agree Limited Partnership (the Operating Partnership”), a Delaware limited partnership.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “will,” “seek,” “could,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and which could materially affect the Company’s results of operations, financial condition, cash flows, performance or future achievements or events. Currently, one of the most significant factors, however, is the adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets. The extent to which COVID-19 impacts the Company and its 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. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Additional factors which may cause actual results to differ materially from current expectations include, but are not limited to: the factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, including those set forth under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; global and national economic conditions and changes in general economic, financial and real estate market conditions; the financial failure of, or other default in payment by, tenants under their leases and the potential resulting vacancies; the Company’s concentration with certain tenants and in certain markets, which may make the Company more susceptible to adverse events; changes in the Company’s business strategy; risks that the Company’s acquisition and development projects will fail to perform as expected; adverse changes and disruption in the retail sector and the financing stability of the Company’s tenants, which could impact tenants’ ability to pay rent and expense reimbursement; the Company’s ability to pay dividends; risks relating to information technology and cybersecurity attacks, loss of confidential information and other related business disruptions; loss of key management personnel; the potential need to fund improvements or other capital expenditures out of operating cash flow; financing risks, such as the inability to obtain debt or equity financing on favorable terms or at all; the level and volatility of interest rates; the Company’s ability to renew or re-lease space as leases expire; limitations in the Company’s tenants’ leases on real estate tax, insurance and operating cost reimbursement obligations; loss or bankruptcy of one or more of the Company’s major tenants, and bankruptcy laws that may limit the Company’s remedies if a tenant becomes bankrupt and rejects its leases; potential liability for environmental contamination, which could result in substantial costs; the Company’s level of indebtedness, which could reduce funds available for other business purposes and reduce the Company’s operational flexibility; covenants in the Company’s credit agreements and unsecured notes, which could limit our flexibility and adversely affect our financial condition; credit market developments that may reduce availability under our revolving credit facility; an increase in market interest rates which could raise the Company’s interest costs on existing and future debt; a decrease in interest rates, which may lead to additional competition for the acquisition of real estate or adversely affect the Company’s results of operations; the Company’s hedging strategies, which may not be successful in mitigating the Company’s risks associated with interest rates; legislative or regulatory changes, including changes to laws governing real estate investment trusts (“REITs”); the Company’s ability to maintain its qualification as a REIT for federal income tax purposes and the

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limitations imposed on its business by its status as a REIT; and the Company’s failure to qualify as a REIT for federal income tax purposes, which could adversely affect the Company’s operations and ability to make distributions.

Overview

The Company is a fully integrated 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, (the Operating Partnership), of which the Company is the sole general partner and in which the Company held a 99.4% interest as of September 30, 2020. Under the partnership agreement of the Operating Partnership, we, as the sole general partner, have exclusive responsibility and discretion in the management and control of the Operating Partnership. As of September 30, 2020, the Company’s portfolio consisted of 1,027 properties located in 45 states and totaling approximately 21.0 million square feet of gross leasable area (“GLA”).

As of September 30, 2020, the Company’s portfolio was approximately 99.8% leased and had a weighted average remaining lease term of approximately 9.8 years. A significant majority of our properties are leased to national tenants and approximately 62.2% of our 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 our tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance.

We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 1994. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes and we intend to continue operating in such a manner.

COVID-19

We are closely monitoring the impact of the novel coronavirus (“COVID-19”) pandemic on all aspects of our business and geographies, including how it is impacting our tenants and business partners. We are unable to predict the impact that the COVID-19 pandemic will ultimately have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include 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. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak continues to rapidly evolve and, many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. Many states and cities, including where we own properties, have development sites and where our principal place of business is located, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. Although many of these jurisdictions have lifted some of these restrictions, the Company cannot predict whether and to what extent the restrictions will be reinstated, whether additional states and cities will implement similar restrictions or when restrictions currently in place will expire. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which the Company and our tenants operate. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown.

In addition, we cannot predict the impact that COVID-19 will have on our tenants and other business partners; however, any material effect on these parties could adversely impact us. The Company received second and third quarter rent payments from approximately 92% and 97% of its portfolio, respectively. In addition, as is believed to be the case with all retail landlords, the Company received numerous short-term rent relief requests, most often in the form of rent deferral requests. To date, the Company has entered into lease modifications that deferred 4% and 2% of rent originally contracted

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for the second and third quarters of 2020, respectively. These rent deferral percentages are net of any repayments that have since occurred. Not all tenant requests have resulted or will ultimately result in modification agreements, nor is the Company forgoing its contractual rights under its lease agreements. Second and third quarter collections, rent relief requests, and rent concessions to date may not be indicative of collections, requests, or concessions in any future period.

Refer to Note 2 – Summary of Significant Accounting Policies - Rent Concessions – COVID-19 to the Condensed Consolidated Financial Statements within this Quarterly Report on Form 10-Q regarding the Company’s accounting policies for rent concessions. Pursuant to the Company’s accounting elections, rental revenue continued to be recognized for tenants subject to deferral agreements, as long as such agreements did not result in a substantial increase in our rights as the lessor. As a result, rent deferrals did not have a material impact on revenues for the three or nine months ended September 30, 2020.

The impact of the COVID-19 pandemic on our rental revenue for the remainder of 2020 and thereafter cannot, however, be determined at present. The situation surrounding the COVID-19 pandemic remains fluid, and we continue to actively manage our response in collaboration with tenants, government officials and business partners and assess potential impacts to our financial position and operating results, as well as potential adverse developments in our business. For further information regarding the impact of COVID-19 on the Company, see Part II, Item 1A titled “Risk Factors.”

Results of Operations

Overall

The Company’s real estate investment portfolio grew from approximately $2.1 billion in gross investment amount representing 789 properties with 14.0 million square feet of GLA as of September 30, 2019 to approximately $3.0 billion in gross investment amount representing 1,027 properties with 21.0 million square feet of GLA at September 30, 2020. The Company’s real estate investments were made throughout and between the periods presented and were not all outstanding for the entire period; accordingly, a portion of the increase in rental income between periods is related to recognizing revenue in 2020 on acquisitions that were made during 2019. Similarly, the full rental income impact of acquisitions made during 2020 to-date will not be seen until the remainder of 2020.

Acquisitions

During the three months ended September 30, 2020, the Company acquired 91 retail net lease assets for approximately $458.8 million, which includes acquisition and closing costs. These properties are located in 26 states and are leased to 26 different tenants operating in 15 diverse retail sectors for a weighted average lease term of approximately 11.5 years. The underwritten weighted-average capitalization rate on the Company’s third quarter 2020 acquisitions was approximately 6.4%.¹

During the nine months ended September 30, 2020, the Company acquired 217 retail net lease assets for approximately $958.3 million, which includes acquisition and closing costs. These properties are located in 35 states and are leased to 38 different tenants operating in 18 diverse retail sectors for a weighted average lease term of approximately 11.2 years. The underwritten weighted-average capitalization rate on the Company’s year-to-date 2020 acquisitions was approximately 6.4%.¹

Dispositions

During the three months ended September 30, 2020, the Company sold two properties for net proceeds of $3.4 million and recorded a net gain of $1.0 million. During the nine months ended September 30, 2020, the Company sold 16 properties for net proceeds of $46.0 million and recorded a net gain of $7.6 million.

¹ When used within this discussion, “weighted-average capitalization rate” for acquisitions and dispositions is defined by the Company as the sum of contractual fixed annual rents computed on a straight-line basis over the primary lease terms and anticipated annual net tenant recoveries, divided by the purchase and sales prices.

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Development and Partner Capital Solutions

During the three months ended September 30, 2020, the Company completed two development or Partner Capital Solutions projects.

During the nine months ended September 30, 2020, the Company completed six development or Partner Capital Solutions projects. At September 30, 2020, the Company had four development or Partner Capital Solutions projects under construction.

Comparison of Three Months Ended September 30, 2020 to Three Months Ended September 30, 2019


	Three Months Ended				Variance
	September 30, 2020		September 30, 2019		(in dollars)		(percentage)
Rental Income	$	63,701	$	48,020	$	15,681	33	%
Real Estate Tax Expense	$	5,516	$	3,674	$	1,842	50	%
Property Operating Expense	$	2,108	$	1,598	$	510	32	%
Land Lease Expense	$	325	$	354	$	(29)	(8)	%
Depreciation and Amortization Expense	$	17,327	$	11,897	$	5,430	46	%

The variances in rental income, real estate tax expense, property operating expense, land lease expense and depreciation and amortization expense shown above were due to the acquisitions and ownership of additional properties during the three months ended September 30, 2020 compared to the three months ended September 30, 2019, as further described under Results of Operations - Overall above.

General and administrative expenses increased $1.0 million, or 24%, to $4.8 million for the three months ended September 30, 2020, compared to $3.8 million for the three months ended September 30, 2019. The increase was primarily the result of increased employee headcount and increased compensation costs. General and administrative expenses as a percentage of total revenue decreased to 7.5% in the third quarter of 2020 from 8.0% in the third quarter of 2019.

Provision for impairment increased $2.9 million, to $2.9 million for the three months ended September 30, 2020, compared to $0 for the three months ended September 30, 2019. Provisions for impairment reflect the amount by which current book value exceeds estimated fair value and are not necessarily comparable period-to-period.

Interest expense increased $1.8 million, or 22%, to $10.2 million for the three months ended September 30, 2020, compared to $8.4 million for the three months ended September 30, 2019. The increase in interest expense was primarily a result of higher levels of borrowings in the third quarter of 2020 in comparison to the third quarter of 2019. Borrowings increased in order to finance the acquisition and development of additional properties. Acquisition and development activity increased in the third quarter of 2020 compared to the prior period.

Gain on sale of assets decreased $1.6 million, or 63%, to $1.0 million for the three months ended September 30, 2020, compared to $2.6 million for the three months ended September 30, 2019. Gains on sales of assets are dependent on levels of disposition activity and the assets’ bases relative to their sales prices. As a result, such gains are not necessarily comparable period-to-period.

Income tax expense increased $0.1 million, or 66%, to $0.3 million for the three months ended September 30, 2020 compared to $0.2 million for the three months ended September 30, 2019. The increase in income tax expense was primarily due to the acquisition and the ownership of additional properties during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Net income increased $0.6 million, or 3%, to $21.4 million for the three months ended September 30, 2020, compared to $20.8 million for the three months ended September 30, 2019. The change was the result of the items discussed above.

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Comparison of Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2019


	Nine Months Ended				Variance
	September 30, 2020		September 30, 2019		(in dollars)		(percentage)
Rental Income	$	176,960	$	135,240	$	41,720	31	%
Real Estate Tax Expense	$	15,058	$	11,016	$	4,042	37	%
Property Operating Expense	$	6,303	$	4,832	$	1,471	30	%
Land Lease Expense	$	977	$	922	$	55	6	%
Depreciation and Amortization Expense	$	47,067	$	32,597	$	14,470	44	%

The variances in rental income, real estate tax expense, property operating expense, land lease expense and depreciation and amortization expense shown above were due to the acquisitions and ownership of additional properties during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, as further described under Results of Operations - Overall above.

General and administrative expenses increased $2.3 million, or 19%, to $14.0 million for the nine months ended September 30, 2020, compared to $11.7 million for the nine months ended September 30, 2019. The increase was primarily the result of increased employee headcount and increased compensation costs. General and administrative expenses as a percentage of total revenue decreased to 7.9% in the first nine months of 2020 from 8.7% in the first nine months of 2019.

Provision for impairment increased $2.4 million, or 148%, to $4.0 million for the nine months ended September 30, 2020, compared to $1.6 million for the nine months ended September 30, 2019. Provisions for impairment reflect the amount by which current book value exceeds estimated fair value and are not necessarily comparable period-to-period.

Interest expense increased $4.9 million, or 21%, to $28.3 million for the nine months ended September 30, 2020, compared to $23.4 million for the nine months ended September 30, 2019. The increase in interest expense was primarily a result of higher levels of borrowings year-to-date in 2020 in comparison to the corresponding period of 2019. Borrowings increased in order to finance the acquisition and development of additional properties. Acquisition and development activity increased in the first nine months of 2020 compared to the prior period.

Gain on sale of assets decreased $1.4 million, or 16%, to $7.6 million for the nine months ended September 30, 2020, compared to $9.0 million for the nine months ended September 30, 2019. Gains on sales of assets are dependent on levels of disposition activity and the assets’ bases relative to their sales prices. As a result, such gains are not necessarily comparable period-to-period.

Income tax expense increased to $0.8 million for the nine months ended September 30, 2020 compared to $0.2 million for the nine months ended September 30, 2019. The Company recorded a one-time credit of $0.5 million during the nine months ended September 30, 2019 to reflect a reduction in the Company’s deferred tax liability of one of its taxable REIT subsidiaries.

Net income increased $10.2 million, or 18%, to $68.2 million for the nine months ended September 30, 2020, compared to $58.0 million for the nine months ended September 30, 2019. The change was the result of the items discussed above.

Liquidity and Capital Resources

The Company’s principal demands for funds include payment of operating expenses, payment of principal and interest on its outstanding indebtedness, dividends and distributions to our stockholders and holders of the units of the Operating Partnership (the “Operating Partnership Units”), and future property acquisitions and development.

The Company expects to meet its short-term liquidity requirements through cash provided from operations and borrowings under its Revolving Credit Facility (as defined in Debt – Senior Unsecured Revolving Credit Facility below). As of September 30, 2020, available cash and cash equivalents, including cash held in escrow was $16.2 million. As of September 30, 2020, the Company had $20.0 million outstanding on its revolving credit facility and $480.0 million was available for future borrowings, subject to its compliance with covenants. The Company anticipates funding its long-term

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capital needs through cash provided from operations, borrowings under its revolving credit facility, the issuance of debt and common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity.

The Company continually evaluates alternative financing, and believes that the Company can obtain financing on reasonable terms. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to us. Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted, could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled “Risk Factors” and in the other reports the Company has filed with the Securities and Exchange Commission (“SEC’). Additionally, refer to COVID-19 earlier in this Management’s Discussion and Analysis.

The full impact of the COVID-19 pandemic on our rental revenue and, as a result, future cash from operations cannot be determined at present.

Capitalization

As of September 30, 2020, the Company’s total market capitalization was approximately $4.6 billion. Total market capitalization consisted of $3.5 billion of common equity (based on the September 30, 2020 closing price on the NYSE of $63.64 per common share) and assuming the conversion of Operating Partnership Units and $1.1 billion of total debt, including (i) $20.0 million of borrowings under its revolving credit facility; (ii) $240.0 million of unsecured term loans; (iii) $860.0 million of senior unsecured notes; (iv) $33.6 million of mortgage notes payable, less (v) cash, cash equivalents and cash held in escrow of $16.2 million. The Company’s total debt to enterprise value was 24.6% at September 30, 2020.

At September 30, 2020, the non-controlling interest in the Operating Partnership represented ownership of 0.6% of the Operating Partnership. The Operating Partnership Units may, under certain circumstances, be exchanged for shares of common stock on a one-for-one basis. 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 its shares. Assuming the exchange of all Operating Partnership Units, there would have been 55,718,144 shares of common stock outstanding at September 30, 2020.

Equity

Follow-on Public Offerings

In April 2020, the Company completed a follow-on public offering of 2,875,000 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 375,000 shares of common stock. Upon closing, the Company issued 2,875,000 shares and received net proceeds of $170.4 million, after deducting fees and expenses.

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proceeds of approximately $88.0 million. The remaining 4,651,666 shares of common stock available for issuance under the April 2020 Forward are required to be settled no later than April 20, 2021.

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. During the third quarter of 2019, the Company issued 444,228 shares of common stock under the 2019 ATM Program, at an average price of $74.30, realizing net proceeds of $32.6 million. In addition to selling shares of common stock, the Company also entered into forward sale agreements through the 2019 ATM Program, as described below.

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. Additionally, 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. During the nine months ended September 30, 2020, the Company settled all forward sale agreements under the 2019 ATM Program realizing net proceeds of $359.5 million.

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

During the first three quarters of 2020, the Company entered into forward sale agreements to sell an aggregate of 1,832,846 shares of common stock. The Company has since settled 204,074 shares of these forward sale agreements, realizing net proceeds of $12.5 million. The Company is required to settle the remaining outstanding shares of common stock under the 2020 ATM Program by various dates between April and September 2021.

2018 ATM Program

In May 2018, the Company entered into a $250.0 million ATM program (“2018 ATM Program”) through which the Company, from time to time, sold shares of common stock and entered into forward sale agreements. During the nine months ended September 30, 2019, the Company issued 886,768 shares of common stock under the 2018 ATM Program, realizing net proceeds of approximately $58.5 million. The 2018 ATM Program was subsequently terminated, and no future issuances will occur under the 2018 ATM Program.

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Debt

The below table summarizes the Company’s outstanding debt as of September 30, 2020 and December 31, 2019 (in thousands):


	Interest			Principal Amount Outstanding
Senior Unsecured Revolving Credit Facility	Rate		Maturity	September 30, 2020		December 31, 2019
Credit Facility ⁽¹⁾	0.97	%	January 2024	$	20,000	$	89,000
Total Credit Facility				$	20,000	$	89,000

Unsecured Term Loans ⁽²⁾
2023 Term Loan	2.40	%	July 2023		40,000		40,000
2024 Term Loan Facility	3.09	%	January 2024		65,000		65,000
2024 Term Loan Facility	3.20	%	January 2024		35,000		35,000
2026 Term Loan	4.26	%	January 2026		100,000		100,000
Total Unsecured Term Loans				$	240,000	$	240,000

Senior Unsecured Notes ⁽²⁾
2025 Senior Unsecured Notes	4.16	%	May 2025	$	50,000	$	50,000
2027 Senior Unsecured Notes	4.26	%	May 2027		50,000		50,000
2028 Senior Unsecured Notes	4.42	%	July 2028		60,000		60,000
2029 Senior Unsecured Notes	4.19	%	September 2029		100,000		100,000
2030 Senior Unsecured Notes	4.32	%	September 2030		125,000		125,000
2030 Senior Unsecured Public Notes ⁽³⁾	3.49	%	October 2030		350,000		—
2031 Senior Unsecured Notes	4.42	%	October 2031		125,000		125,000
Total Senior Unsecured Notes				$	860,000	$	510,000

Mortgage Notes Payable ⁽²⁾
Single Asset Mortgage Loan	6.24	%	February 2020	$	—		2,775
CMBS Portfolio Loan	3.60	%	January 2023		23,640		23,640
Single Asset Mortgage Loan	5.01	%	September 2023		4,639		4,779
Portfolio Credit Tenant Lease	6.27	%	July 2026		5,363		5,921
Total Mortgage Notes Payable				$	33,642	$	37,115

Total Principal Amount Outstanding				$	1,153,642	$	876,115

(1)	The annual interest rate of the Revolving Credit Facility (defined below) assumes one-month LIBOR as of September 30, 2020 of 0.15%.

(2)	Interest rate includes the effects of variable interest rates that have been swapped to fixed interest rates.

(3)	The principal amount outstanding for the $350.0 million 2030 Senior Unsecured Public Notes is presented excluding their original issue discount.

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 $65.0 million unsecured term loan facility (the “$65 Million Term Loan”) and a $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”). The Credit Agreement amended and restated in its entirety the Company’s previous credit agreement dated December 15, 2016.

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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 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.

Unsecured Term Loan Facilities

The Credit Agreement extended the maturity dates of the $65 Million Term Loan and the $35 Million Term Loan 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 the 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 September 30, 2020, $100.0 million was outstanding under the 2024 Term Loan Facilities, bearing an all-in interest rate of 3.13%, including the swaps.

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Senior Unsecured Notes

In May 2015, the Company and 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 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 its 4.42% senior unsecured notes due July 2028 (the “2028 Senior Unsecured Notes”).

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

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. 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%.

All of the senior unsecured notes described in the preceding paragraphs were sold to only institutional investors in private placements pursuant to Section 4(a)(2) of the Securities Act of 1933.

Mortgage Notes Payable

As of September 30, 2020, the Company had total gross mortgage indebtedness of $33.6 million which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $40.1 million. Including mortgages that have been swapped to a fixed interest rate, the weighted average interest rate on the Company’s mortgage notes payable was 4.22% as of September 30, 2020 and 4.40% as of December 31, 2019.

The Company has 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.

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Loan Covenants

Certain loan agreements contain various restrictive covenants, including the following financial covenants: maximum 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 September 30, 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 September 30, 2020.

Cash Flows

Operating - Substantially all of the Company’s cash from operations is generated by rental income from its investment portfolio. Net cash provided by operating activities for the nine months ended September 30, 2020 increased by $2.3 million over the same period in 2019, primarily due to the increase in the size of the Company’s real estate investment portfolio, partially offset by a cash payment at settlement of outstanding interest rate swap agreements.

Investing - Net cash used in investing activities was $385.5 million higher during the nine months ended September 30, 2020, compared to the same period in 2019. Acquisitions of properties during the first nine months of 2020 were $396.5 million higher than the same period in 2019, due to overall increases in the level of acquisition activity. Development costs during the nine months ended September 30, 2020 were $.5 million higher than the same period in 2019, due to the timing of costs incurred related to the Company’s development activity. Proceeds from asset sales increased by $11.5 million during the nine months ended September 30, 2020 compared to the same period in 2019. Proceeds from asset sales are dependent on levels of disposition activity and the specific assets sold. Proceeds from asset sales are not necessarily comparable period-to-period.

Financing - Net cash provided by financing activities was $400.5 million higher during the nine months ended September 30, 2020, compared to the same period in 2019. Net proceeds from the issuance of common stock and borrowings increased by $352.6 million during the nine months ended September 30, 2020 compared to the same period in 2019, primarily to fund the increased level of acquisitions occurring in 2020. Net proceeds from the issuance of senior unsecured notes increased by $349.7 million during the nine months ended September 30, 2020, compared to the same period in 2019, primarily to fund the increased level of acquisitions occurring in 2020. In addition, borrowings on the Revolving Credit Facility decreased by $298.0 million during the nine months ended September 30, 2020, compared to the same period in 2019, due to increased level of equity and debt proceeds in 2020. The Company increased its total dividends and distributions paid to its stockholders and non-controlling owners by $17.7 million during the first nine months of 2020 compared to the same period in 2019. The Company’s annualized dividend during the third quarter of 2020 is $2.40 per common share, a 5.3% increase over the annualized $2.28 per common share declared in the third quarter of 2019.

Contractual Obligations

The following table summarizes the Company’s contractual obligations as of September 30, 2020 (in thousands):


	Remainder of
	2020		2021		2022		2023		2024		Thereafter		Total
Mortgage Notes Payable	$	240	$	998	$	1,060	$	28,725	$	963	$	1,656	$	33,642
Revolving Credit Facility		—		—		—		—		20,000		—		20,000
Unsecured Term Loans		—		—		—		40,000		100,000		100,000		240,000
Senior Unsecured Notes		—		—		—		—		—		860,000		860,000
Land Lease Obligations		267		1,015		789		789		789		30,584		34,233
Estimated Interest Payments on Outstanding Debt ⁽¹⁾		11,048		31,939		31,877		30,491		26,592		132,878		264,825
Total	$	11,555	$	33,952	$	33,726	$	100,005	$	148,344	$	1,125,118	$	1,452,700

(1)	Includes estimated interest payments based on (i) the stated rates for mortgage notes payable, including the effect of interest rate swap agreements; (ii) the stated rates for unsecured term loans, including the effect of interest rate swap

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agreements and assuming the interest rate in effect for the most recent quarter remains in effect through the respective maturity dates; and (iii) the stated rates for senior unsecured notes.

Dividends

During the quarter ended September 30, 2020, the Company declared a quarterly dividend of $0.60 per share. The cash dividend was paid on October 9, 2020 to holders of record on September 25, 2020.

Recent Accounting Pronouncements

Refer to Note 2 – Summary of Significant Accounting Policies.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires the Company’s management to use judgment in the application of accounting policies, including making estimates and assumptions. Management bases estimates on the best information available at the time, its experience, and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting principles would have been applied, resulting in a different presentation of the interim Condensed Consolidated Financial Statements. From time to time, the Company may re-evaluate its estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of the Company’s critical accounting policies is included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The Company has not made any material changes to these policies during the periods covered by this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures

Funds from Operations (“FFO” or “Nareit FFO”)

FFO is defined by the National Association of Real Estate Investment Trusts, Inc. (“Nareit”) to mean net income computed in accordance with GAAP, excluding gains (or losses) from sales of real estate assets and/or changes in control, plus real estate related depreciation and amortization and any impairment charges on depreciable real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations.

FFO should not be considered an alternative to net income as the primary indicator of the Company’s operating performance, or as an alternative to cash flow as a measure of liquidity. Further, while the Company adheres to the Nareit definition of FFO, its presentation of FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that all REITs may not use the same definition.

Core Funds from Operations (“Core FFO”)

The Company defines Core FFO as Nareit FFO with the addback of noncash amortization of above- and below- market lease intangibles. Under Nareit’s definition of FFO, lease intangibles created upon acquisition of a net lease must be amortized over the remaining term of the lease. The Company believes that by recognizing amortization charges for above- and below-market lease intangibles, the utility of FFO as a financial performance measure can be diminished. Management believes that its measure of Core FFO facilitates useful comparison of performance to its peers who predominantly transact in sale-leaseback transactions and are thereby not required by GAAP to allocate purchase price to lease intangibles. Unlike

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many of its peers, the Company has acquired the substantial majority of its net-leased properties through acquisitions of properties from third parties or in connection with the acquisitions of ground leases from third parties.

Core FFO should not be considered an alternative to net income as the primary indicator of the Company’s operating performance, or as an alternative to cash flow as a measure of liquidity. Further, the Company’s presentation of Core FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that all REITs may not use the same definition.

Adjusted Funds from Operations (“AFFO”)

AFFO is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. AFFO further adjusts FFO and Core FFO for certain non-cash and/or infrequently recurring items that reduce or increase net income computed in accordance with GAAP. Management considers AFFO a useful supplemental measure of the Company’s performance; however, AFFO should not be considered an alternative to net income as an indication of its performance, or to cash flow as a measure of liquidity or ability to make distributions. The Company’s computation of AFFO may differ from the methodology for calculating AFFO used by other equity REITs, and therefore may not be comparable to such other REITs.

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Reconciliations

The following table provides a reconciliation from net income to FFO, Core FFO and AFFO for the three and nine months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Reconciliation from Net Income to Funds from Operations
Net income	$	21,416	$	20,781	$	68,210	$	58,020
Depreciation of rental real estate assets		12,669		8,866		34,387		24,785
Amortization of lease intangibles - in-place leases and leasing costs		4,523		2,965		12,315		7,618
Provision for impairment		2,868		—		3,996		1,609
(Gain) loss on sale of assets		(970)		(2,597)		(7,567)		(8,973)
Funds from Operations	$	40,506	$	30,015	$	111,341	$	83,059

Amortization of above (below) market lease intangibles, net		3,964		3,381		11,552		9,882
Core Funds from Operations	$	44,470	$	33,396	$	122,893	$	92,941

Straight-line accrued rent		(2,294)		(1,975)		(5,614)		(5,165)
Deferred tax expense (benefit)		—		—		—		(475)
Stock based compensation expense		1,233		1,033		3,471		2,972
Amortization of financing costs		223		176		560		541
Non-real estate depreciation		135		66		365		194
Adjusted Funds from Operations	$	43,767	$	32,696	$	121,675	$	91,008

Funds from Operations Per Share - Diluted	$	0.74	$	0.70	$	2.16	$	2.03
Core Funds from Operations Per Share - Diluted	$	0.81	$	0.78	$	2.39	$	2.27
Adjusted Funds from Operations Per Share - Diluted	$	0.80	$	0.77	$	2.36	$	2.22

Weighted average shares and Operating Partnership Units outstanding
Basic		54,069,575		42,180,076		50,985,188		40,340,322
Diluted		54,903,291		42,665,661		51,499,081		40,973,060

Additional supplemental disclosure
Scheduled principal repayments	$	236	$	543	$	699	$	2,150
Capitalized interest	$	54	$	118	$	109	$	321
Capitalized building improvements	$	973	$	240	$	3,248	$	1,200
Contractual rents subject to deferral ¹	$	1,000			$	3,157
Uncollected contractual rents not subject to deferral ¹	$	494			$	2,693

¹Beginning in the second quarter of 2020, the Company began providing supplemental disclosures due to the COVID-19 pandemic. “Contractual rent” for any period means the recurring cash amount charged to tenants, inclusive of monthly base rent and recurring operating cost reimbursements due pursuant to lease agreements, for such period. “Contractual rents subject to deferral” are presented net of amounts repaid under deferral agreements. “Uncollected contractual rents not subject to deferral” as used within this table exclude rents that have been deemed uncollectible for purpose of ASC 842. Rents deemed uncollectible are excluded from the reported net income and funds from operations measures in the reconciliation above.

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ITEM 3.Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to interest rate risk primarily through borrowing activities. There is inherent roll-over risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company’s future financing requirements.

The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal payments and the weighted average interest rates on outstanding debt, by year of expected maturity, to evaluate the expected cash flows and sensitivity to interest rate changes. Average interest rates shown reflect the impact of the swap agreements described later in this section.

($ in thousands)


	2020			2021			2022			2023			2024			Thereafter			Total
Mortgage Notes Payable	$	240		$	998		$	1,060		$	28,725		$	963		$	1,656		$	33,642
Average Interest Rate		6.02	%		6.02	%		6.02	%		3.89	%		6.27	%		6.27	%

Unsecured Revolving Credit Facility ⁽¹⁾	$	—		$	—		$	—		$	—		$	20,000		$	—		$	20,000
Average Interest Rate														1.09	%

Unsecured Term Loans	$	—		$	—		$	—		$	40,000		$	100,000		$	100,000		$	240,000
Average Interest Rate											2.40	%		3.13	%		4.21	%

Senior Unsecured Notes	$	—		$	—		$	—		$	—		$	—		$	860,000		$	860,000
Average Interest Rate																	3.98	%

(1)	The balloon payment balance includes the balance outstanding under the Revolving Credit Facility as of September 30, 2020. The Revolving Credit Facility matures in January 2024, with options to extend the maturity date by six months up to two times, for a maximum maturity of January 2025.

The fair value is estimated to be $35.1 million, $251.5 million and $970.8 million for mortgage notes payable, unsecured term loans and senior unsecured notes, respectively, as of September 30, 2020.

The table above incorporates those exposures that exist as of September 30, 2020; it does not consider those exposures or positions which could arise after that date. As a result, the Company’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates.

The Company seeks to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs by closely monitoring its variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous. From time to time, the Company may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose us to the risks that the other parties to the agreements will not perform. The Company could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly effective cash flow hedges under GAAP guidance.

In 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 1 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 September 30, 2020, these interest rate swaps were valued as a liability of approximately $1.0 million.

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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 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 September 30, 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 1 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 September 30, 2020, these interest rate swaps were valued as a liability of approximately $12.5 million.

The Company does not use derivative instruments for trading or other speculative purposes and the Company did not have any other derivative instruments or hedging activities as of September 30, 2020.

Refer to the section “Risks Related to Our Debt Financings” under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 for discussion of the future transition from LIBOR and the possible impact it may have on the Company’s debt, swap agreements, and interest payments.

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ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

At the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that its disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company is not presently involved in any material litigation nor, to its knowledge, is any other material litigation threatened against us, except for routine litigation arising in the ordinary course of business which is expected to be covered by its liability insurance.

ITEM 1A. Risk Factors

For a discussion of our potential risks and uncertainties, see the information below and under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

The current pandemic of the novel coronavirus, or COVID-19, and the future outbreak of other highly infectious or contagious diseases, could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.

The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak continues to rapidly evolve and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.

Many states and cities, including where we own properties, have development sites and where our principal place of business is located, have also reacted by instituting quarantines, social distancing requirements, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. Although many of these jurisdictions have lifted some of these restrictions, the Company cannot predict whether and to what extent the restrictions will be reinstated, whether additional states and cities will implement similar restrictions or when restrictions currently in place will expire. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which the Company and our tenants operate. A number of our tenants have announced temporary closures of their stores and requested rent deferral or rent abatement during this pandemic.

In addition, our employees based at our headquarters have been working remotely to varying extents. The effects of restrictions on our operations, including future restrictions and extended periods of remote work arrangements, could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. The COVID-19 pandemic, or a future pandemic, could also have material and adverse

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effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors:

●

a complete or partial closure of, or other operational issues at, one or more of our properties resulting from government or tenant action;

●

the reduced economic activity severely impacts our tenants' businesses, financial condition and liquidity and may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations;

●

the reduced economic activity could result in a prolonged recession, which could negatively impact consumer discretionary spending;

●

difficulty accessing debt and equity capital on attractive terms, or at all, impacts to our credit ratings, and a prolonged severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis and our tenants' ability to fund their business operations and meet their obligations to us;

●

the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of our Revolving Credit Facility and other debt agreements and result in a default and potentially an acceleration of indebtedness, which non-compliance could negatively impact our ability to make additional borrowings under our Revolving Credit Facility and pay dividends;

●

any impairment in value of our tangible or intangible assets which could be recorded as a result of a weaker economic conditions;

●

a continued decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow our portfolio of properties;

●

a deterioration in our or our tenants' ability to operate in affected areas or delays in the supply of products or services to us or our tenants from vendors that are needed for our or our tenants' efficient operations could adversely affect our operations and those of our tenants; and

●

the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption.

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. Additional closures by our tenants of their stores, tenant bankruptcies, tenant lease defaults, and early terminations by our tenants of their leases could reduce our cash flows, which could impact our ability to continue paying dividends to our stockholders at expected levels or at all.

The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance. Moreover, many risk factors set forth our Annual Report on Form 10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

Not applicable.

ITEM 6. EXHIBITS


4.1	Indenture, dated as of August 17, 2020, among the Agree Limited Partnership, Agree Realty Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 17, 2020).

4.2	Indenture Officer’s Certificate, dated as of August 17, 2020, among the Agree Limited Partnership, Agree Realty Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 17, 2020).

4.3	Form of Global Note for 2.900% Notes due 2030 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 17, 2020).

4.4	Form of Guarantee by and among Agree Limited Partnership, the Guarantors named therein and U.S. Bank National Association (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 17, 2020).

*10.1+	Employment Agreement dated June 18, 2020, between Agree Realty Corporation and Craig Erlich.

*10.2+	Addendum to Employment Agreement dated August 19, 2020, between Agree Realty Corporation and Craig Erlich.

*31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Joel N. Agree, Chief Executive Officer

*31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Clayton R. Thelen, Chief Financial Officer

*32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Joel N. Agree, Chief Executive Officer

*32.2	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Clayton R. Thelen, Chief Financial Officer

*101	The following materials from Agree Realty Corporation’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2020 formatted in Inline iXBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statement of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these consolidated financial statements.

*104	Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

+ Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Agree Realty Corporation

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

/s/ CLAYTON R. THELEN
Clayton R. Thelen
Chief Financial Officer and Secretary
(Principal Financial Officer)

Date: October 19, 2020

Exhibit 10.1

AGREE REALTY CORPORATION

70 East Long Lake Road

Bloomfield Hills, Michigan 48304

June 18, 2020

Mr. Craig Erlich

SENT VIA EMAIL TO: Craig Erlich

Re:Letter Agreement of Employment for Craig Erlich (“You” or “Your”)

Dear Mr. Erlich:

This Letter Agreement (“Letter Agreement”) sets forth the terms and conditions by which Agree Realty Corporation (“ADC” or the “Company”) retains Your services.

Position:	Chief Investment Officer, reporting directly to Joel Agree, President and Chief Executive Officer. ADC has its sole and exclusive discretion to change, extend or to curtail the precise services and duties You are to perform.
Best Efforts:	All duties rendered by You for and on behalf of ADC shall be of the highest professional standards. You shall devote Your full time, energies and talents to the success of Agree, provided that You may continue to engage in other business, civic and charitable endeavors so long as they comply with this Agreement and do not materially interfere with Your duties hereunder. You shall use Your best efforts to promote and shall during and after the expiration of this Letter Agreement, do nothing to reduce or injure the reputation of ADC.
Employment At-Will:	You agree to be an “at-will” employee and acknowledge that there is no guaranty that Your employment by ADC is for any period of time and that Your employment may be terminated for any reason whatsoever or for no reason and with or without cause.
Expected Start Date:	You agree to commence employment at ADC on approximately July 20, 2020 (the “Start Date”). You shall not be entitled to any of the benefits or rights under this Letter Agreement, unless and until You commence employment with ADC on or before the Start Date.
2020 ADC BOD Fee:	In conjunction with Your employment with the Company, You will forfeit and waive Your 2020 Director and Lead Independent Director fee, provided that You will receive a prorated fee for 2020 through the Start Date.

Annual Base Salary & Cash Bonus:	$350,000.00 payable in accordance with ADC’s normal payroll practices and subject to all required withholdings and deductions. You will be eligible to receive an annual cash bonus that is targeted to be $218,750.00, with a maximum up to $306,250.00. The cash bonus will be based on achieving performance metrics, as determined by the Company, and will be prorated in the first year based on the percentage of the year that You were employed by ADC. The annual cash bonus will be paid at the same time such bonuses are paid to other ADC executives, and You must be employed on the payment date to be eligible to receive the bonus except as set forth herein. The annual base salary and bonus range may be adjusted in subsequent years.
Long-Term Incentive Compensation:	You will be eligible to receive, on an annual basis, restricted stock and performance shares of ADC similar to other named executives. The estimated annual amount is targeted to be $218,750.00, with a maximum up to $306,250.00. The restricted stock awards will be based on achieving performance metrics and will be prorated in the first year based on the percentage of the year that You were employed by ADC. All other terms of Long-Term Incentive Compensation and equity grants will comply with ADC’s existing programs and agreements for such compensation and shares, including applicable vesting, dividend and forfeiture provisions.
Signing Bonus	You will receive an Equity Signing Bonus in the form of a grant of restricted stock of ADC in the value of $300,000.00 on Your Start Date. Terms of your Equity Signing Bonus will be subject to ADC’s existing programs and agreements, including applicable vesting and forfeiture provisions.
Benefits:	You will be entitled to the same employee benefits, on generally the same terms, as those made available to other ADC employees at Your level.
Paid Time Off:	You will be entitled to twenty (20) days paid time off per calendar year, exclusive of ADC observed holidays and national holidays, to be taken in accordance with applicable ADC policies. The paid time off will be prorated in the first year based on the percentage of the year that You were employed by ADC. You may become eligible for additional days of paid time off as Your length of service with the Company increases.
Severance	(a) If, during the 12 months following the Start Date (the “Severance Period”), Your employment is terminated without Cause, You will receive, in addition to any accrued amounts: (1) during the remainder of the Severance Period, continued payment of your Annual Base Salary, payable in equal installments as if Your employment had not ended; (2) a payment equal to your Annual Cash Bonus at target, prorated based on the percentage of the year that You were employed by ADC; (3) immediate vesting of any restricted stock, stock option or other equity awards You then hold, to the extent unvested, including any performance awards at target during the Severance Period; and (4) during the Severance Period, such health benefits under the Company’s health plans and programs applicable to senior executives of the Company generally as You would have received and at such costs to You as would have applied in the absence of such termination, provided that the Company shall in no event be required to provide such benefits after such time as

You become entitled to receive benefits from another employer or recipient of Your services. For the avoidance of doubt, any such health coverage provided under subsection (4) above shall run concurrently with any applicable continuation coverage period as required by the Consolidated Omnibus Budget Reconciliation Act.

(b) If Your employment is terminated without Cause due to or within one year following a Change in Control (as defined in ADC’s 2020 Omnibus Incentive Plan), You will receive either (in lieu of the severance amounts and benefits set forth in subsection (a), if applicable): (1) a cash amount equal to the sum of (i) 200% of Your current Annual Base Salary, (ii) 200% of Your Annual Cash Bonus for the previous fiscal year, and (iii) any Long-Term Incentive Compensation for the year in which the termination occurs will be considered earned at the target level and immediately vested; or (2) in the event Your employment is terminated due to a Change in Control which occurs during the first year of employment, a cash amount equal to the sum of (i) 200% of Your current Annual Base Salary plus $200,000, (ii) 200% of Your target Annual Cash Bonus, and (iii) Your Long-Term Incentive Compensation will be considered as earned at the target level and immediately vested. The values for items (1)(i) and (ii) and (b)(i) and (ii) shall be automatically adjusted down from 200% to 100% after the two-year anniversary of the Start Date.

(c) Subject to the 6-month delay in payment that may be required to comply with Section 409A of the Internal Revenue Code (the “Code”), as amended (“Section 409A”), any severance payments shall be payable in equal semi-monthly installments over the twelve (12) month period following Your termination in accordance with ADC’s normal payroll practices, on its standard payroll dates, and subject to all required withholdings and deductions. All of the foregoing severance entitlements shall be conditioned on (1) Your delivery, within thirty (30) days after Your last date of employment, of a signed and irrevocable release agreement in a form prepared by ADC and (2) Your strict compliance with Your post-employment obligations. The severance payments will commence on first payroll date occurring more than 60 days after the termination of Your employment, with the first payment covering the time period from the termination date through the payment date.

(d) “Cause” shall mean: (1) You fail or refuse to (i) observe or perform any term, covenant or provision of this Letter Agreement or any other agreement with ADC; or (ii) perform any assigned duties requested by ADC; (2) You breach Your fiduciary duty to ADC; (3) You are under investigation for committing, charged with, and/or convicted of a felony or any other crime which might cause clients to question the business practices or reputation of ADC; (4) You commit any act of theft, embezzlement, fraud, dishonesty or disloyalty with respect to ADC; (5) You use alcohol in an unprofessional fashion, non-prescribed narcotics or contraband during working hours or on ADC premises; (6) You and ADC cannot agree as to the operation of the business of ADC, in a manner that is detrimental to ADC, its operations and/or its employees as reasonably determined by ADC; or (7) You are insubordinate or otherwise disruptive in a manner that is detrimental to ADC, its operations and/or its employees as reasonably determined by ADC.

Section 409A:

This Letter Agreement is intended to comply with Section 409A or an exemption thereunder, and shall be construed and administered in accordance with Section

409A. Notwithstanding any other provisions of this Letter Agreement, payments provided under this Letter Agreement may only be made upon an event, and in a manner, that complies with Section 409A or an applicable exemption. Any payment under this Letter Agreement that may be excluded from Section 409A shall be excluded from Section 409A to the maximum extent possible. For purposes of Section 409A, each installment payment provided under this Letter Agreement shall be treated as a separate payment. Any payment to be made under this Letter Agreement upon termination of employment shall only be made upon a “separation from service” under Section 409A. Notwithstanding the foregoing, ADC makes no representations that the payments and benefits provided under this Letter Agreement comply with, or are exempt from, Section 409A and in no event shall ADC be liable for any portion of any taxes, penalties, interest or other expenses that may be incurred by You on account of non-compliance with Section 409A. If either the Company or You in good faith determine that any provision of this Agreement would cause You to incur additional tax, penalty or interest under Section 409A, the Company and You shall use reasonable efforts to reform such provision, if possible, in a mutually agreeable manner to maintain, to the maximum extent practicable, the original intent of the applicable provision without violating the provisions of Section 409A or causing the imposition of such additional tax, penalty, or interest under Section 409A.

Section 280G

If any payment or benefit (including payments and benefits pursuant to this Agreement) You would receive in connection with a Change in Control from the Company or otherwise (the “Payment”) would (a) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (b) but for this section, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall pay only a part of the Payment so that You receive the largest payment possible without the imposition of the Excise Tax. If a reduced Payment is made, You shall have no rights to any additional payments and/or benefits constituting the Payment. Any reduction in payments as a result of this provision shall be made in the reverse chronological order in which such payments would otherwise be due.

Confidentiality and Restrictive Covenants:

(a) Confidential Information. The relationship with ADC has been and/or will be one of trust and confidence and there has been and/or will be available to You certain confidential and proprietary business and financial information, related trade secrets and proprietary information of ADC which includes, but may not be limited to, the records and information of ADC dealing with income, investments, investment or development opportunities, customer or tenant lists, rent rolls, project lists, investor lists, investor identities, investment returns, business strategies, business methods, business practices, services, financial information, leasing information, access codes, business strategies, all information contained in or on the computer hard drives and/or servers of ADC, customer or tenant contact information including telephone numbers, addresses and e-mail information, business methods, marketing methods, and other items relative thereto (herein collectively and individually referred to as the “Confidential Information”). The Confidential Information shall not include information that has come into the public domain through no fault of You and/or information disclosed to You by another person who is not bound to any obligation of confidentiality. The Confidential Information is an extremely valuable

and important asset of ADC and the unauthorized use of the Confidential Information would cause irreparable economic and business injury to ADC. You shall hold the Confidential Information in strict confidence and in trust for ADC and shall not disclose or otherwise communicate, provide or reveal in any manner whatsoever any of the Confidential Information to any person or entity without the prior written consent of ADC. Upon termination of employment, You shall return to ADC, without demand from ADC, any Confidential Information disclosed or provided to You, including, but not limited to, all originals, copies, reproductions, notes, facsimiles, samples, models and products thereof, whether, the same is in digital or document form. The return of the Confidential Information shall also include but not be limited to the return of all the following items to ADC immediately upon the termination of employment: automobile, keys, computers, computer programs, documents, customer and tenant lists, addresses, telephone numbers, computer discs, notebooks, drawings, manuals, and such or all other recorded, written or printed materials and supplies relating to research or business of the ADC. The Confidential Information, regardless of form, is, and shall always remain, the sole and exclusive property of ADC.

Notwithstanding the foregoing, nothing in this Agreement shall prohibit You from participating, testifying, or assisting in any investigation, hearing or other proceeding before any federal, state, or local government agency or pursuant to a lawfully issued subpoena, nor does anything herein preclude or otherwise limit Your rights and abilities to report matters to, or otherwise participate in, any whistleblower program administered by any such agencies. In addition, You acknowledge that, under the Defend Trade Secrets Act of 2016, 18 U.S.C. § 1836(B), an individual may not be held criminally or civilly liable under any federal or state trade secret law for disclosure of a trade secret: (i) made in confidence to a government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law; and/or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Additionally, an individual suing an employer for retaliation based on the reporting of a suspected violation of law may disclose a trade secret to his or her attorney and use the trade secret information in the court proceeding, so long as any document containing the trade secret is filed under seal and the individual does not disclose the trade secret except pursuant to court order.

(b) Employees. During the term of Your employment with ADC and for a period of two (2) years following the termination of Your employment (the “Period”), You shall not, directly, indirectly for Your own benefit or for the benefit of any other person, firm or business organization, Solicit for purposes of employment or association any employee or agent of ADC, or induce any employee or agent of ADC to terminate such employment or association for purposes of becoming employed or associated elsewhere, or hire or otherwise engage any employee or agent of ADC as an employee of a business with whom You may be affiliated or permit such hiring to the extent You have the authority to prevent same, or otherwise interfere with the relationship between ADC and its employees and agents. For purposes of this Letter Agreement, an employee or agent shall mean an individual employed or retained by ADC during the term of this Letter Agreement and/or who terminates such association with ADC within a period of six (6) months either prior to or after Your termination hereunder. For purposes of this Letter Agreement, the phrase “Solicit”

	shall mean any contact, communication, dialogue or undertaking whether the same is initiated by You or by another individual on Your behalf or at Your direction.
	(c) Business Prospects. During the Period, You shall not, directly, indirectly, for Your own benefit or for the benefit of any other person, firm or business organizations, Solicit for purposes of transacting business, any business prospect of ADC or induce any business prospect of ADC to terminate such association with ADC for proposes of transacting business elsewhere or becoming associated elsewhere or otherwise attempting to divert any business prospect from ADC, except where, (i) any firm or business organization for which You are subsequently employed, has an existing verifiable business relationship with such business prospect; and (ii) transacting business with such business prospect has no adverse effect on ADC; and (iii) You are not engaged in providing services or support to such business prospect during the Period. You shall prevent such solicitation to the extent You have authority to prevent same and shall otherwise not interfere with the relationship between ADC and its business prospects. Notwithstanding the foregoing, this provision shall not prevent You from Soliciting business prospects of ADC to provide services in the experiential marketing industry, so long as such activities do not divert business from ADC or reduce the amount of business that such business prospects conduct with ADC. For purposes of this Letter Agreement, the term “business prospects” shall mean any individual and/or business entity with whom ADC has undertaken to transact business or whom has been targeted for purposes of transacting business.
	(d) Non-Competition. During the Period, You shall not, directly or indirectly, for Your own benefit or for the benefit of any other person, firm or business organizations, engage in any activity that is competitive with ADC’s “Business,” as defined below, within the United States (including, but not limited to, as an employee, consultant, advisor, agent, independent contractor, owner, partner, co-venturer, principal, director, shareholder, lender or otherwise). The “Business” will mean the type of business in which ADC is engaged during Your employment and/or the type of the business about which ADC has formulated plans to engage during Your employment.
	(e) Conduct. (i) No Improper Use of Confidential Information. During the term of Your employment with ADC and at all times after the termination of the relationship by either party with or without advance notice or cause, You shall not use any Confidential Information of ADC to attempt to negatively influence or otherwise discourage or dissuade any of ADC’s customers, business prospects or referral sources from utilizing the services of ADC. (ii) Advice. You shall during the term of Your employment with ADC and at all times after the termination of the relationship by either party with or without advance notice or cause, remain available to advise and at all times after the termination of the relationship by either party with or without advance notice or cause, You shall remain available to advise ADC in areas which include, but are not limited to assisting ADC with customer or

business matters in which You were involved and advise ADC as to the status of various matters and follow up requirements related to tasks performed by You.

(iii)

No Disparagement. You shall not, during the term of Your employment with ADC and at all times after the termination of the relationship by either party with or without advance notice or cause, communicate, orally or in writing, or by any other matter whatsoever to any third party, any claim, remark, allegation, statement, opinion, innuendo, or information of any kind or nature whatsoever, the effect or intention of which is to cause embarrassment, damage or injury to the reputation or standing in the local, state, national, or international community of ADC, its officers, directors, shareholders, members or employees, whether any such communication is or may be true or founded in facts.

(iv)

Systems. You acknowledge and agree that You have no expectation of privacy with respect to ADCs telecommunications, networking, or information processing systems, (including, without limitation, stored company files, email messages, text messages, and voice messages) and that Your activities and any files or messages or use of any of those systems may be monitored and or intercepted at any time without notice and You consent to such monitoring and interception. You further agree that any property situated on ADC’s premises and owned by ADC, including, disks, and other storage media, filing cabinets and other work areas is subject to inspection by ADC without notice.

Modification:

Provided such modifications are uniformly applied to similarly situated ADC employees, ADC has the right to and may unilaterally modify the terms and conditions of employment including, by way of illustration and not limitation, job descriptions, rules and regulations, benefit packages and compensation as it deems appropriate in its sole and exclusive discretion. All benefits packages, salary and incentive compensation awards may be subject, on an annual basis, to the approval of the Compensation Committee of ADC.

Arbitration:

Except for the equitable enforcement of this Letter Agreement, the parties shall arbitrate any and all disputes relative to the employment relationship and/or termination from ADC that otherwise would be resolved by judicial or administrative proceeding or are in any way related to any alleged wrongful acts on the part of ADC, whether such disputes are based on alleged statutory violations or otherwise (i.e., age, race, gender, religion or any other form of protected class discrimination or harassment), contractual breaches or otherwise, exclusively through the Procedures and Policies of the American Arbitration Association, unless other procedures are agreed upon in writing between the parties. Venue for any such hearings shall be Oakland County, Michigan. All substantive rights provided under any applicable statute and/or law, the right to representation by counsel, an opportunity for reasonable discovery, a neutral arbitrator, a fair arbitral hearing, and a written arbitral award containing findings of facts and conclusions of law shall be available in the arbitration. You shall not disclose or announce to third parties, except Your attorneys and retained professionals, that the proceedings are taking

	place and You shall keep the nature and substance of the proceedings confidential and not disclose the same to third parties. The determination of the arbitrator shall be binding and final upon all parties. The award of the arbitrator may be filed with the Clerk of the Circuit Court for the County of Oakland, Michigan, and judgment may be rendered by the Court upon the arbitration award and execution may be issued upon the judgment. The cost for arbitration shall be split equally between ADC and You.
Limitations:	Any arbitration or judicial proceeding arising out of a dispute relative to Your employment, shall not be brought by You unless the same is commenced within the applicable statute of limitations or One Hundred Eighty (180) days following the incident giving rise to such dispute, whichever is shorter. If You fail to commence such a proceeding within such period, any rights You may have to prosecute such a claim shall be extinguished and terminated. In the event a court of competent jurisdiction determines this provision is overly restrictive, then the court having jurisdiction may alter such provision to that deemed reasonable under State law.
Enforcement:	This Letter Agreement shall remain enforceable and shall survive the expiration or termination of the employment relationship and shall not be deemed merged or extinguished by any act absent the specific written intention of the parties to do so. The undertakings contained herein relate to matters which are of a special, unique and extraordinary importance to ADC and, that without such covenants, ADC would be unwilling to employ You. A violation of any of the terms hereof would cause irreparable injury to ADC, the amount of which may be impossible to estimate or determine and which may not be compensated adequately. ADC may, at its sole option and in its exclusive discretion, take or exercise any and all remedies and actions available at law or equity, including but not limited to the following rights and remedies, concurrently, consecutively or alternatively. ADC may file a suit in equity to enforce the terms and provisions hereof by obtaining the issuance of an Ex-Parte Restraining Order to enjoin and prohibit You from such breach or threatened breach hereof. In any action for injunctive relief or a restraining order, ADC shall not be obligated to post a bond or any security as a condition to obtain the issuance of a restraining order, injunction or other equitable relief. If the provisions of this Letter Agreement are deemed overly restrictive, the court having jurisdiction may alter such provisions to provide for the maximum protection of ADC which is deemed reasonable under State law. Notwithstanding the foregoing, You acknowledge that all of the provisions hereof are reasonable, and waive any defense on such basis.
Entire Agreement:	This Letter Agreement represents the entire agreement between You and ADC and supersedes and cancels any prior or contemporaneous arrangements, understandings or agreements, whether written or oral, by and between You and ADC relative to the subject matter hereof. Any amendments hereto shall be in writing and executed by both parties. In the event of a conflict between this Letter Agreement and any other agreement or plan, this Letter Agreement shall govern and control.
Governing Law:	This Letter Agreement shall be governed by and construed in accordance with the laws of the United States of America and the State of Michigan. Without limiting

the applicability of the Arbitration provisions contained herein, exclusive venue and jurisdiction for resolution of all disputes shall lie with the state and/or federal courts having jurisdiction over Oakland County, Michigan.

If You agree with the terms and conditions contained herein, please sign and return a copy of this Letter Agreement to the undersigned.

Very truly yours,

AGREE REALTY CORPORATION

/s/ Nicole Witteveen__________________

Nicole Witteveen

Vice President, People & Culture

AGREED TO AND ACCEPTED BY:

Craig Erlich

/s/ Craig Erlich____________________

(Employee Signature)

Date: June 18, 2020

Exhibit 10.2

ADDENDUM TO LETTER AGREEMENT OF EMPLOYMENT

The “Start Date” referenced in the Letter Agreement of Employment dated June 18, 2020 is agreed to be August 19, 2020, consistent with the commencement of employment on that date.

/s/ Craig Erlich August 19, 2020

Craig ErlichDate

Chief Investment Officer

/s/ Nicole Witteveen August 19, 2020

Nicole WitteveenDate

Vice President, People & Culture

Exhibit 31.1

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

I, Joel N. Agree, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the period ending September 30, 2020 of Agree Realty Corporation;

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

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

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

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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


Date: October 19, 2020	/s/ Joel N. Agree

	Name:	Joel N. Agree
	Title:	President and Chief Executive Officer

Exhibit 31.2

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

I, Clayton Thelen, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the period ending September 30, 2020 of Agree Realty Corporation;

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


Date: October 19, 2020	/s/ Clayton Thelen

	Name:	Clayton Thelen
	Title:	Chief Financial Officer and Secretary

Exhibit 32.1

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

Based on a review of the Quarterly Report on Form 10-Q for the period ending September 30, 2020 of Agree Realty Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joel N. Agree, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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


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

October 19, 2020

Exhibit 32.2

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

Based on a review of the Quarterly Report on Form 10-Q for the period ending September 30, 2020 of Agree Realty Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Clayton Thelen, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

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

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


/s/ Clayton Thelen
Clayton Thelen
Chief Financial Officer and Secretary

October 19, 2020